Finances & Money

Tips for Evaluating a New Loan

Personal loans are a smart way to manage large expenses, whether they come unexpected or they are a long-planned purchase. Securing a personal loan means there is no need to put up an asset, like your vehicle for title loans in LA, or use high-interest credit cards that seem never to be paid down. While personal loans offer predictable repayment terms and a relatively low interest rate compared to other credit types, they are not all created equal. Before taking out a personal loan for the next big purchase or an unexpected bill, be sure to evaluate the loan offer based on these tried and true tips.

Unnecessary Insurance

Some lenders offer what’s known as loan protection insurance – coverage intended to benefit the borrower should some unexpected event take place. For instance, loan protection insurance may pay for all or a portion of the required minimum loan payment if the borrower becomes disabled. In some cases, the amount owed at the time of the borrower’s death is forgiven when loan protection insurance is in place.

Borrowers who are taking out a small personal loan, or are securing the loan with collateral, may not need this loan protection insurance. It, as like most other benefits, comes at a cost, paid as part of the monthly loan payment. If there are other assets to cover the loan payment should disability or death take place, loan protection insurance is not necessary, nor is its monthly cost.

Added Fees

Personal loans are not all the same when it comes to the fees paid to the lender for underwriting or funding the account. Often lenders will charge what’s known as an origination fee which is calculated as either a flat, up-front fee or a percentage of the amount borrowed. Some lenders may also charge fees for submitting an application, checking credit history or score, or paying over the phone or via check. If a lender is tacking on one or more of these fees without explaining them fully, it may be worth shopping around for a different financial institution for the loan.

Variable Interest Rates

One of the benefits of utilizing a personal loan for major purchases and other financing needs is the predictability offers to borrowers. Not only is the monthly payment set for the life of the loan but the interest rate is fixed. That is, unless the lender offers a loan with a variable interest rate. Unlike a fixed rate, a variable interest rate loan gives lenders the ability to increase the cost of the loan by raising the interest rate. For short-term loans, a variable interest rate is not typically a bad sign. However, the longer the term of a loan, the greater the number of opportunities for the lender to increase the interest rate over time.

Penalties for Pre-payment

Loans are meant to be fixed, steady financing solutions with a set repayment term, unlike revolving credit accounts to allow for flexible repayment based on the borrower’s means each month. Given this unique feature of a loan, some lenders charge for deviating from the repayment term. Should a borrower have the money to pay off the loan before the last payment is due, a prepayment penalty could apply. Avoid loans that have this as a restriction in the fine print.

Loans can be beneficial to managing one’s financial life over time, but it is necessary for borrowers to know what they are getting into before signing on the dotted line. Evaluate a loan offer based on its insurance protection, fees, interest rate, and prepayment limitations, and select the loan offer that best meets your needs in each area.

 

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Susan Paige

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