3 Mistakes To Avoid When Getting A Loan
By: Ian Golightly MBA
Suppose you’re seasoned for getting loans; that’s great. If it’s your first time getting a loan and you’re reading this article, that’s even better. Many financial gurus will probably tell you to avoid getting a loan and that you should pay with everything for cash. Unless you have liquid cash just lying around, the financial gurus are correct and just pay in cash. Some of us are not as lucky, and sometimes we must leverage the resources at hand like a loan.
It’s important to understand that a loan is a tool that can provide leverage to obtain assets, build a business, or make life efficient (buying a car). Without being responsible, it is easy to fall into a trap with a loan to where you’re required to pay a heft price for many years. In this post, you’ll learn the top 3 personal loan mistakes you want to avoid to save money and time.
Identify Origination Fees
An origination fee is a charge to process your application. Every contract is different, but the fee is usually based on the amount of credit is granted as requested. For example, in mortgage loans, a mortgagee is obligated to pay little as 0.5% and a high of 2% over a mortgage loan as per the lender’s policy.
Typically, in real estate, you’re not obligated to pay the origination fee upfront since it can be included in the final loan total. For example, let say you get a loan of $5,000 at a 6% interest rate for a five-year term will have a cost of $800 in just interest. Adding $100 as the origination fee will push the interest amount by $20.
It may not sound very much, but it can disrupt your budget for larger loans and high-interest rates. Loans vary, and it depends on the type of loan too, so it’s essential to research all of your options.
Almost all loans have origination fees, so it’s essential to be upfront and ask your lender how much the fees will cost. If there aren’t any origination fees, then you’re fortunate! Most of the time, in these situations, there’s a deal going on where the lender may give you a ‘credit,’ so it looks like there is no charge.
Simple Math Ignored
Interest rates can be our worst enemies, or they can also be our best friend. Understanding your interest rate is very important when you are getting a loan. Consumers usually go to different lending services to find the best interest rate based on the loan term.
Did you know that a private financial institution operates differently than a bank (for example, PNC and SunTrust), and the same for a credit union?
If you have no interest in learning the methodology behind the calculation used by these different lenders, you may pass up the opportunity to possibly pay lower interest amounts. Please don’t settle for what you see and have an assumption that it is black and white writing. Lenders set up their loan contracts to their advantage before the consumer.
Remember, it’s part of their business operations to make a profit. Because of that, you must know the lender’s policies when dealing with early and late payments.
Lenders make their money from interest rates. When you pay early and higher than the bare minimum, that results in that you’ll probably pay off the loan quicker than the loan term. The lender will not profit as much as projected and may charge a yearly pay-off fee. As you can see, you must know the fine print inside and out.
Sometimes, a lower interest rate may not be as good as it sounds with bad terms than a slightly higher loan in an interest rate with better terms.
Understand The Penalties:
The above statements can give you an idea about possible penalties. I advise that you ask on the get-go about the prepayment penalty clause to the representative handling the loan. I typically bring up this question in high prices items like a mortgage loan. If you’re wondering what a prepayment penalty is, you must pay it if you pay off your loan before the set scheduled loan date.
Paying off your loan early is great for the consumer, but not so much for the lender. When consumers pay off the lender quicker, the lender loses money from the interest that could have been paid overtime. The lender will then issue a penalty to buffer that loss.
Before you sign your name on the dotted lines, it will be imperative to ask these questions while reading thoroughly through the jargon. If something doesn’t sound clear, make sure you ask questions to get a better understanding. Depending on what kind of asset you are buying, it may be essential to consult with your financial advisor.
Having a financial advisor dealing with these jargon contracts can give you the upper hand in weighing out the pros and cons. A great financial advisor should tell you to shop around and bring them the different contracts, so they can present each one to you to determine the one that fits your financial goals.
Here are three basic foundational mistakes to avoid when getting a loan. The funny thing is that almost everyone has made a mistake when getting a loan. No matter the size of the error, the result may potentially cost more than the actual loan. Even though loans may provide leverage depending on the intent of getting a loan, you are still accountable for understanding what you are signing up for. Understanding the loan is a great way to combat and protect your hard-earned money.