10 Things to Know Before Getting a Loan
Getting loans is now easier than it used to be. There are several offers online with many lenders promising to offer loans in less than 24 hours. These advertisements have made loans easily available to many people. Even though getting loans looks easy, they are not as easy as they appear. If you do not take enough care, you may take a loan that will keep you in a debt cycle for a long time.
1. Limitations of Unsecured Loans
Unsecured loans have limits. Unsecured loans are not backed by a personal property and there are no risks for the borrower. Due to this, lenders have placed caps on the amount they are willing to offer to borrowers. Lenders usually grant a maximum of $25,000 to people who want unsecured loans.
2. Secured loans are held against your property
You will need to use your property such as a home, car, or investment as collateral for secured loans. This means you will risk losing that property if you are unable to pay off the loan. The good thing about this option is the interest rates are lower and you can access a larger sum of money.
3. Do not always believe the advertised rates
The rates that are advertised are usually the ‘typical rates’. Although some lenders offer the rates they advertise, others offer rates higher than what they advertise. You should check if the lender is offering the rate they advertised.
4. Direct Student Loan Consolidation
Direct student loan consolidation allows you to put your student loans together in one single payment. Student loan consolidation comes with fixed interest rates and this rate is maintained throughout the tenure of the loan. You should, however, note that direct student loan consolidation is only applicable for federal student loans. Private student loans cannot be consolidated. There are several options when it comes to student loan consolidation and it is, therefore, important to shop for options before settling on one lender.
5. The longer the term, the more interest rate you will pay
Payment terms for installment loans vary. You may decide to make huge monthly payments for a short period or small monthly payments for longer periods. The longer the payment term the higher the interest you will pay on the loan. You may not notice this since you will be making small payments at the end of the month. But if you make a careful calculation, you will realize that you have paid more interest at the end than someone who took a short term loan. If you can afford to pay off your loans within a short term, you should opt for a short term payment plan.
6. A credit card can be a better choice for short-term lending
If you need a short term loan, it will be better to get a 0% purchase card. A 0% credit card offers you interest-free purchases for a limited period. If you can pay back before the grace period ends, it will be a cheaper option. If you decide to choose this option, do not spend beyond the amount you can clear before the grace period ends.
7. Paying back the loan earlier can cost you
Some lenders can charge you penalties for paying the loan before the due date. This is because the lender will lose some amount of the interest rate. If the loan is less than $25,000, you will pay two months worth of interest as penalty for paying before the due date. If the loan amount is higher than that, the penalty will also be higher.
8. Beware of Hidden Fees
Lenders will not tell you the conditions on their loans upfront. Everything you need to know will be written in the terms and conditions. Make it a point to read the terms and conditions before committing yourself. You should also check the fees the lenders will charge on the loan. You should ask questions when you do not understand anything.
9. Variable Payments
Most secured loans come with variable payments. This means the rates may change depending on the prevailing rates. If the loan you intend to take comes with a variable rate, ask about the potential rates. There are cases where the rates rise along the line and borrowers are unable to pay off the loan. Do not let that happen to you. Make sure you have a fair idea about the rates before you proceed.
10. Be Cautious When Consolidating Loans
Consolidating your loan is supposed to put your loans together to enable you to to make a single payment. It is also supposed to reduce your interest rate and reduce your monthly payments. However, some loan consolidations do not help you to achieve this. Sometimes, the fees may take up all the savings on the interest rate and you may end up even paying more after loan consolidation. When you want to consolidate your loan, you should shop around for options. Look for offers that offer low interest rate and fees. Do your calculations and make sure that you will not be losing out after loan consolidation.