Applying for a new loan can be stressful and even confusing at times. Many people will apply for several different loans over the course of their lifetime, such as car and boat loans, home mortgage loans, personal loans, and more. With most types of loans, you will be paying the balance of the loan off for many years to come. So you do want to take a few steps to ensure you get the best loan possible. Consider these tips:
1. Lender Rates and Fees Can Vary
It is common for individuals to shop around for rates before applying for a loan, but often individuals do not realize just how significantly rates and fees can vary. More than that, they don’t understand why rates and fees vary. Some lenders simply have higher loan costs, and these costs are reflected to you in the form of higher fees. Other lenders, however, will increase the fees while advertising a lower rate. On the surface, such loans with lower rates may appear to be a better deal. Yet with further inspection, you may find that these programs are more costly overall.
2. Fees May Be Negotiable
Many people consider bank and lender fees as fixed. Just as you wouldn’t walk into a department store and negotiate for a lower price on a new shirt, you wouldn’t think about negotiating bank fees either. However, these fees actually can be negotiated in some cases just as you would negotiate the sales price of a new car. When negotiating fees, however, pay attention to how adjustments to fees may be affecting the rate and term of the loan. Some banks and lenders will simply concede to charging lower fees. Others, however, will attempt to adjust the rate or term to make up for their concessions on fees.
3. Rates Can be Adjusted
The interest rate on a loan affects your monthly payment and thus your overall budget for years to come. It also, however, affects the total interest charges you pay over the life of the loan. You certainly want to find a loan with a monthly payment that is affordable for you to pay for on a monthly basis. However, you should also consider how slight adjustments to the rate by buying up or buying down the rate can affect the total cost of the loan. A lender or mortgage broker can provide you with a spreadsheet comparing total interest charges for your loan with different interest rates in place.
4. Term Lengths Affect Total Loan Costs
Just as the interest rate can affect total loan costs, so too can the term of the loan. With most loans, you will have the option to extend or shorten the term length. It is common for individuals to opt for a longer term length, as this generally provides for lower monthly payments. However, by extending the term length, you also increase the length of time you are paying interest on the loan. You can request a spreadsheet from a bank or lender that compares interest charges for a loan with different term lengths. This comparison along with a comparison of a loan with different interest rates can help you to find the most affordable loan option.
5. Some Loans Have Prepayment Penalties
Many people apply for a loan with the lowest monthly payments possible with the goal in mind keeping required payments lower. They make plans to pay the balance off more quickly on their own terms rather than through the requirement of higher monthly payments. While this may be a good strategy in some cases, many individuals have been surprised to learn that their loan has a prepayment penalty in place. Prepayment penalties are more common with mortgage loans, but they may be found with other types of loans as well. This penalty goes into effect when any portion of the principal is prepaid early, and generally an additional fee is charged when principal is paid back early. You should consider reading the terms of a loan carefully to learn if the loan you are applying for has a prepayment penalty in place.