Is Interest The Only Aspect Of A Loan?

loans1.jpgAfter consumers complete the loan application and have chosen a loan type, the lender provides several documents to borrowers that disclose important aspects of the loan.

When it comes to borrowing money, it is common to focus on the interest rate. It makes sense, because the interest rate plays the largest role in determining how much the loan will actually cost, plus the interest rate is the easiest way for lenders to market their products.

While interest rates are certainly important, every loan has four common factors that will ultimately determine whether or not the loan is a good deal.

– Most loans come with some type of fee. This fee is usually used to pay for processing or originating the loan, and the fee isn’t always transparent. Sometimes the fees can be worked into the overall cost of the loan, or they may be completely separate. You will probably have to ask in order to find out what the fees are.

– Again, interest rates are used to advertise most loans, and obviously, the lower the rate, the better. One thing you do have to consider is whether the rate is fixed or adjustable, and if there are any special conditions that need to be met in order to qualify for the advertised rate.

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– A longer term on a loan means lower monthly payments, but this isn’t always a good thing. The longer the loan, the more interest you’ll pay. This is where interest rate can come into play again and lenders will offer a very attractive rate, but require the term of the loan to be quite long. This can actually make the loan more costly than a shorter term loan with a higher rate. Make sure you do the math before signing any papers.

– Most people simply ignore the fine print, but this can be a costly mistake. Buried deep inside the terms and conditions you may find things like prepayment penalties, late fees, rate adjustments, refinancing restrictions, and much more. What could be an otherwise very attractive loan, may be so cluttered with potential fees and restrictions that you’re almost trapped into the loan. Take a few minutes to read and understand all of the fine print.

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1 Response

  1. Genia says:

    Great tips, thanks!

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