10 things to know before getting a loanLeave a Comment
If you’re about to take out your first loan, the good news is that there are plenty of options to choose from. However, you may be totally confused about what to look out for. So we’ve made a list of 10 things you need to know before you make your decision.
1. Limitations of unsecured loans
Unsecured loans are aimed at people who want to borrow a relatively small amount which tend to be between $1,000 and $25,000.
2. Secured loans are held against your property
Secured loans or ‘homeowner loans’ get their name because of the fact that the debt is held against your property. That means your home is at risk of repossession if you can’t keep up with your monthly repayments.
The minimum loan size of a secured loan is normally around $10,000 and you might be able to borrow up to 100,000$. However, the maximum loan size could be lower, depending on how much equity you have in your home.
3. Advertised rates aren’t always real
The advertised rates you see on many loan deals are ‘typical rates’. That means the loan company uses a strategy called risk-based pricing. At least 66% of successful applicants must be offered the typical rate, however a third may be offered a rate that is higher than that.
4. Direct student loan consolidation
A direct consolidation loan allows you to consolidate multiple federal education loans into one loan. The result is a single monthly payment instead of multiple payments. A direct consolidation loan has a fixed interest rate throughout the loan tneure. The fixed rate is based on the weighted average of the interest rates of the student loans being consolidated and rounded up to one-eighth of 1%. You should always look for the best student loan consolidation.
5. The longer the term, more interest you’ll pay
The cost of your monthly repayments depends on the amount you are looking to borrow and the period of time over which you’ll repay the debt.
You can reduce your monthly repayment by opting for a longer term. However, this will lead to you paying more in interest.
For example, if you have borrowed 5,000$ over five years at 7.9%, your monthly repayments would be 101.14$ and you’d end up paying back 6,068.57$ in total – more than 1,068$ in interest. On the other hand, if you cut the loan term to three years, your monthly payments would increase to 156.45$ for a total repayment of 5,632.25$. This will save you more than 400$ over the lifetime of the loan. Therefore, you should base the term of your loan on the maximum amount you can afford to pay each month.
6. A credit card can be a better choice for short-term lending
If you need to borrow money over a very short period of time, you may be better off with a 0% purchase card. By purchasing on a 0% card, you will have the length of the introductory offer to pay back the money you owe without having to pay any interest. However, don’t be tempted to keep spending until you have cleared the balance because at the end of the 0% period, interest will be charged at a much higher rate.
7. Paying back the loan earlier can cost you
Many secured loan companies charge early redemption penalties. These effectively penalisze those who repay early because the lender is missing out on a sizeable chunk of interest. For amounts borrowed of less than 25,000$, penalties are restricted to two months worth of interest. As for larger loan amounts, the penalties can be much higher.
8.Beware of other hidden fees
Read the lending company’s terms and conditions thoroughly before applying for a loan and check for hidden fees. For instance, several lenders charge administration or arrangement fees to set up a loan, while others will penalize you for making late payments.
9. Variable payments
The rates for unsecured loans tend to be fixed, but many secured loans have variable rates so your repayments could potentially increase. You have to make sure you know what you’re signing up for so that you don’t get overwhelmed if your lender suddenly hikes the rate.
10. Be careful of credit card consolidation loans
Taking out a loan to pay off credit card debts for more than one card and consolidating the payments is one of the most popular uses of online loans.
If that’s your purpose of taking out a loan, make sure that you don’t forget the original intention by accumulating new credit card debts once you pay off the old ones and have fresh credit.