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After years of loyalty, the car your parents gave you in high school finally breaks down and is in need of some major repairs. But you don’t have that kind of cash. Whether you’re thinking about getting a personal loan to cover the costs or just biting the bullet and getting new car, there are some questions you need to consider before getting a loan.
First, applying for a loan is serious business. While it might seem obvious, no matter how small the loan, signing a promissory note is a huge commitment. With sneaky business tactics and unanswered questions, you could end up getting in way over your head.
Here are the most important questions you should ask when applying for a loan.
Knowing your credit score will help you gauge what type of loan you’ll get approved for. If you have a great credit score, you’ll get a lower interest rate. But if you have a low credit score or you’re a new borrower, then you’re more likely to get a higher interest rate, which will result in a higher payment and dishing out more money in the end.
According to financial management platform Credit Karma, “If you have a low score, you could always consider whether it might be worth it to hold off on applying for a loan. It may make a considerable amount of difference if you choose to raise your credit score before applying.”
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A secured loan is usually back by collateral from the borrower, which usually comes in the form of a down payment. These loans typically have a lower rate than an unsecured loan because the risk is lower. Since unsecured loans don’t require collateral upfront, they are lending at a higher risk of default, resulting in a higher interest rate. As Credit Karma advises, “you should never go into the process expecting to default on a loan, but it’s always smart to keep this collateral in mind when choosing the right offer for you.”
Knowing your interest rate before you commit to a loan will give you an idea of how much you’re actually being charged. The interest rate, usually referred to as the annual percentage rate (APR), is usually tacked onto the payment resulting in a P&I (principal and interest). But some loans are sneaky and require you to pay all the interest upfront. In these cases, you are left paying years of interest while your actual borrowed amount stays the same. Be mindful of these tactics and search for the lowest interest rate when shopping for loans.
The repayment period is the length of your loan. Depending on the type of loan, the period is either 12, 60, 72 or 84 months and in the cases of buying a house, 30 years. The shorter your repayment period, the higher your monthly payments will be because you have less time to pay it off. But as Credit Karma confirms, “a longer payment period means you’ll be paying interest rates for an extended period of time,” which could result in a higher loan cost overall.
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It might sound crazy, but some lenders charge a penalty for paying ahead of time. This puts you in a tough spot when you do end up having extra cash to put towards your loan before the due date. And you definitely don’t want to wait until this happens to find out. So ask ahead of time and try to avoid getting involved if a pre-payment penalty is in place.
Even though you’re not taking out a loan with the intention of never paying it back, it’s still good to know what will happen if you do end up defaulting. You never know, you might be unable to afford the payment one month. Inform yourself on the penalties for late payment and what the consequences are for non-payment.
The bottom line? Always do you research and be prepared before taking out a loan. Don’t be afraid to ask questions and make sure you understand all the terms of the contract. In the case of borrowing money, it’s better to be safe than sorry.
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