When in the market for a personal loan, to avoid taking out a loan with a total cost that will be more than the amount you borrow, it would be a good idea to familiarize yourself with varying loan aspects to try and avoid. At times, people are in such states of despair, that they do not read the fine print of their loan agreement, or ask the lender questions before agreeing to and executing their loan documents.
Repayment Terms
High interest rate – The interest rates linked with unsecured loans are either variable of fixed. If you are ever late with the payments of your loan, lenders are going to increase your interest rate for the duration of your loan. So, before executing any loan agreement, make sure that rate increase is reasonable and affordable to you. Things happen and being late for a payment is a potential for anyone and everyone.
If you are considering a variable rate loan that is based on prime, check out what the current prime rate is. If it's high, you should look for a fixed rate loan.
Longer loan terms – The term is the duration of time you have for paying your loan back to the lender, and are usually month time frames. When you utilize a longer loan term, you will pay less for your monthly premium, since the loan is stretched out over a longer period of time. However, the longer the loan term, the more you are going to pay in interest and total cost for your loan.
Early prepay penalties – Definitely find out if any potential loan has pre-pay penalites associated with it before executing the agreement. You don't want to take out a loan that is going to hit you with any type of fee for paying your loan off early. To avoid losing any profits, lenders often charge pre-pay penalties that will equate to you paying what the total interest would have been if you utilized the entire term of the loan. As a result, there would be no benefit at all for you when paying your loan off early.
Fees – Know what all the fees linked with your loan are. They will be clearly detailed for you in the agreement. Typical frees include: cost if you are late with a payment, bouncing a check, paying over the phone, making payments with a credit card, etc..
Balloon payments – Loans that have balloon payments tied to them should be avoided. Balloon payment loans have large payoff amounts at the conclusion of the loan. As a result of not being able to satisfy this required amount, borrowers often wind up defaulting on balloon payment loans. And as a result of defaulting, severely damaging their credit and even paying more than the amont owed because of the account being sent to collections with higher interest and fees as well as possibly even attorney costs.
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Representative Personal Loan Example: For a $5,000 36-month loan at an interest rate of 6.03% with a 1.11% origination fee of $55.50, you will receive a loan amount of $4,944.50 and will make 36 monthly payments of about $152.18 at a 6.78% APR. Total loan cost would be $5,478.48.