This continues the blog post Essential Questions to Ask About a Loan; here is Part 1 of the post that was published several weeks ago.
When thinking about a loan and approaching a list of lender candidates, it’s a very good idea to become familiar with some of the elements of a loan and a loan contract and be prepared with questions to ask so that you will understand precisely what you may be offered. When meeting with a lender, following are some of the essential questions to think about and explore both prior to and during your lender discussions.
More questions to ask when considering taking out a loan
Do you want the loan secured with collateral or unsecured? With a secured loan there is collateral, which is something of value (usually a possession of some kind) attached to the loan which the lender can take from you if you default—are unable to make payments—on the loan. A common example of collateral would be the vehicle being purchased with a vehicle loan. The vehicle helps secure the loan, and if you cannot fulfill your vehicle loan payments then the lender may legally repossess, or take the vehicle from you since it then becomes the lender’s property. The lender may then sell the vehicle to help satisfy some of the remaining loan debt. An unsecured loan does not use collateral.
How much is the total monthly payment and how should it be paid? Again, be certain that you can manage the monthly loan payment without creating financial hardship for yourself. Early in the loan process, find out exactly what the full amount to be paid monthly will be, including all charges or fees. Decide if you want to have payments automatically deducted from an account or prefer to initiate them manually each month on a set date. You may want to calendarize reminders on a computer or mobile phone for advance notice of payment due dates.
What date are payments due and is the date adjustable? What is the date that a payment is due—around the beginning of the month, mid-month or the end of the month? How flexible is that date; Is the date fixed or can it be changed once or repeatedly? Whatever the date, make certain that by that date sufficient funds are available in the paying account to cover the payment.
What is the term—the time length, or duration to pay back the loan—of the loan and do I want to owe money for that amount of time? Terms for different types of loans vary. A mortgage may be for as long as 30 years, while a personal loan term is typically a much shorter term . The longer the loan term, the more expensive it will be, as you are paying off not just the loan, but the interest with it, so more years equals more interest to pay.
What are all of the fees for accepting the loan, such as origination, application, servicing or other fees? Any loan offer should lay out transparently all charges, fees, potential penalties and any other costs related to the loan such as origination, application, servicing or other costs. What are the initial costs for getting the loan and are there any subsequent, ongoing costs in addition to paying the loan principal and interest?
Is there a financial penalty if I pay the loan off early? Lenders make money on the interest charged on the loan, so if a loan is paid back early then they lose money because of fewer interest payments. While some lenders will allow early loan repayment, they may also charge a fee to make up for interest loss due to the premature loan payoff. Ideally, it’s an important cost savings to have the option of paying a loan off ahead of its deadline without getting hit with a prepayment penalty fee, so consider this when shopping for a loan.
Are there late payment fees and how much are they? Due to any number of reasons—maybe a financial or medical emergency, unexpected travel, a calendar reminder not popping up, simple forgetfulness—a loan payment could miss its due date and be late. While making a late payment could be completely accidental and irregular, it may trigger a penalty late fee, adding to the monthly cost. Be aware of all the loan’s conditions, including details of late payment fees.
Are there restrictions on how the loan may be used; what can and can’t you do with the money? Depending on the contractual terms of the loan offer, either the loan is allowed to be used for any purpose or the borrower may be prohibited from undertaking certain activities with the loan. Examples of only some potential usage restrictions for certain types of loans may include not using the loan for investing, gambling, business expenses, making a down payment on real estate or college tuition. When considering a loan offer it is important to know any usage limitations on the loan agreement and avoid those actions that would violate it.
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