When you’re short on cash, there is no shortage of people out there wanting to loan you money. The thing too many people fail to take into account, however, is that lenders don’t loan you money out of the goodness of their heart. This is also not your mom or grandma “lending” you money knowing full well there’s a pretty good chance they will never be paid back.
Taking out a loan without taking a good, long look at the terms and conditions is like jumping out of a plane before checking your parachute. Loan terms can vary drastically, so you can potentially end up paying to twice the amount that you borrow if you aren’t careful. In addition, if you default on a loan, lenders can put a lien on your home, your car or anything else of value that you own.
From auto loans to home loans to small business loans, the internet has brought with it a flood of different ways to borrow money. Not all loans are equal, however, so it cannot be stressed enough how important it is to compare rates and terms before accepting any money. Here are some things to look for to make sure you don’t get taken to the bank when taking out a loan.
- Interest rates
Interest rates on loans can vary drastically and, depending on the size of the loan, just a single percentage point can mean the difference of hundreds, if not thousands, of dollars. For instance, if you took out a $50,000 loan for 5 years at a six percent interest rate, you would end up paying just under $8,000 in interest for a total of $58,000. If you got that same loan at a seven percent interest rate, however, you would end up paying an extra $500 just in interest alone. If you took out the same loan at 12% interest, you would end up paying a full $8,000 more for borrowing the exact same amount of money.
Lenders can tack on all kinds of hidden fees and roll them into the total cost of the loan. You may borrow $10,000 and end up only getting $7,500 or borrowing $10,000 and end up owing $12,000 right out of the gate before any interest has even accrued. Some loans, such as home loans or small business loans, may have some legitimate fees associated with them, but as a general rule, those should be no more than one percent of the total amount of the loan.
Another thing to pay careful attention to is balloon payments or early termination fees. Balloon payments allow you to pay very small monthly payments on a loan, but then get hit with a giant payment at the end. If you can’t make the giant payment, you still default on the loan.
Early termination fees mean that if you pay off the loan early, thus saving yourself from paying all the interest, you may still have to pay a hefty fee equal to all the interest you would have paid. Once again, however, once you’ve signed any documents or paperwork, you are responsible for paying back whatever you agreed to.