Borrowing money is filled with nuances and jargon that can make things challenging for an inexperienced borrower. As such, people are hesitant to sign on the line out of fear of misunderstanding what they’re agreeing to and ending up in a bad financial situation.
There is legislation in place to protect you from scammers, but consumer protection laws vary by state, and there are always loopholes to consider. When borrowing money, knowledge is your best friend. Here are some questions you should ask when getting a loan.
What Kind of Loan do I Qualify For?
Believe it or not, there are different qualifications for different types of loans. You may think that your best bet is to apply for whatever loan you come across and see what sticks, but that approach will cause damage to your credit score.
Take some time to do research and ask the experts what kind of loans you are likely to qualify for. Then you can apply for something that you know you will be able to get, rather than wasting your time and damaging your credit.
What are the Terms of the Loan?
The terms of the loan relate to how long you are allowed to borrow the money for before you have to pay it back. It will also determine your payment schedule, and how much you have to pay back incrementally. Depending on the type of the loan, your payment schedule might be indicative of how much interest you pay in total.
For example, when you have a mortgage, a 20-year term is going to have higher monthly payments than a 25-year term, but you’ll end up paying more in interest over that span of time. Alternatively, making bi-weekly payments rather than monthly payments can also reduce the amount of interest you pay.
Type of Interest Rate
It’s important to know what kind of interest rate you are working with. Is it fixed or variable? Is the loan high interest or low interest? Does your credit score make you eligible for any special, low-interest offers or is it so damaged that high-interest lending is the only option?
Your interest rate ties closely into the terms of the loan as well. A short-term loan, also known as a payday loan, might have high interest rates but is meant to be paid back before those rates make much of an impact. On the other hand, a long-term loan may have lower interest rates, but the lender makes more money because you’re paying for a longer span of time.
Early Payment Penalties
Another question to ask when taking a loan is whether or not there are any early payment penalties. As the interest is how a lender makes money on a loan, there are often penalties associated with paying off your loan early.
If you feel like taking a long-term loan to take advantage of the lower interest rates, with the idea that you’ll pay it back early and save money, you could end up with a large fine. It’s important to understand the penalty for early payment and read the fine print before signing anything.
How Much Can I Borrow?
You’ll want to know how much you can borrow before agreeing to anything. You may discover that one lender can only approve you for an amount less than you require. In this case, you’d have to find another lender to give you the rest (which can get messy) or seek a lender who can give you everything.
It’s also important to know if you can take some of the loan for which you are approved, and come back later if you require more. In some cases, this is an acceptable practice. With other lenders, it’s a one-shot deal.
Whatever you decide to do in regards to getting a loan, be sure to ask lots of questions and work with a trustworthy lender who will be transparent and helpful. If you have a bad feeling about the situation, don’t sign anything.