Loans 101: Questions You Should Ask Before Applying
There’s a loan product for almost everything: cars, school expenses, vacations and computers to name a few. Chances are you have had or will have a loan in your lifetime. Even for those experienced borrowers, it’s important to thoroughly research the loan products at your local credit union to make sure you are receiving a loan that fits your borrowing needs and financial lifestyle. To help you receive the information you need to determine if a certain loan will work for you, we’ve listed a few questions below that you can ask your lender.
What are your interest rates?
Many people naturally think of interest rates when they think of loans. The goal is to receive the lowest interest rate that you can find. Lower interest rates mean you will eventually have to pay back less to the credit union. Many financial institutions determine your interest rate based on your credit score; it’s called risk-based pricing. Essentially, the higher your credit score, the lower your interest rate will be. Because of this pricing model, your lenders may not be able to disclose what interest rate you would have prior to obtaining your credit report. They are generally able to tell you the range of rates for each loan type, which gives you a good starting point. Different types of loans offer different rates, so check around to see which loan offers the lowest rate and if that will work for you.
What term lengths can you offer?
Along the same lines, term lengths are just as important as interest rates but are more than often overlooked.
A term length for a loan means how long the loan is for. Let’s say you take out a vehicle loan that you will pay on for two years. The term length of that loan is 24 months. A longer term length will provide you with smaller monthly payments. It would also mean that you would accrue interest on the loan over a longer period of time. Unlike interest rates, term lengths are a balancing act and require more calculations. Figure out if a lower monthly payment or a shorter term length is best for you and your finances. To make it easier, use a loan calculator generally available on your local financial institution’s website.
Do you have pre-payment penalties?
Paying off a loan is a wonderful feeling. If you are able to pay your loan off early, make sure you won’t be penalized for doing so. Some loan products have pre-payment penalties, a fee of sorts is assessed if the loan is paid off before the term length has been reached. While you might not initially plan on paying your loan off early, it could be a possibility. Maybe you receive a larger tax return or have extra gift money you are able to apply to the loan. In any case, avoid potential fees and ask this question before you submit your application.