The Update

Questions to Ask About Any Loan

In many cases, loans are taken out for compelling reasons: buying that car you’ve always wanted, moving into your dream home, or starting your own business. Because of the thrill associated with these big moves, it’s common to want to rush through the process as quickly as possible. However, doing so could cost you big over time and potentially derail some of your other life goals.

Here are a few facets of any loan to make sure you understand before taking the giant leap.

What Kind of Credit Score Should I have for the Loan?

There are a couple of different factors here. The first is whether your credit score is high enough to qualify for the loan. The second is whether you could save a healthy chunk of money by increasing your credit score. For example, a lender may give you a rate of 8% if your credit score is 620 but a rate of 7% if your score is 720.

If you are wondering what your credit score is, Rio Grande Credit Union members can check their credit score once a quarter. 

How Much am I Borrowing?

The principal, or the amount you’re borrowing, seems like a basic consideration, but sometimes people can get confused between a loan and a line of credit. With a loan, you’re borrowing a set amount of money at one time. With an open line of credit, you can borrow up to the limit, pay down the balance and then continue to borrow more.

What’s the Monthly Payment?

While you may qualify to borrow a certain amount, remember that that doesn’t necessarily mean the monthly payment will fit into your budget. Before you take out a loan, find out what your monthly outlay will look like and whether that fits into your spending and savings plan.

What’s the APR?

The APR, or annual percentage rate, is the amount of interest you’ll pay to borrow the money. It’s also called the interest rate, or sometimes just the rate. With any loan, shopping around to find the lowest rate you can is a good idea. Just make sure the lender isn’t making up the difference of a low interest rate by charging you high fees.

How Much Total Interest Will I Pay on the Loan?

Unless you’re a math wizard, you’ll come across some loans where the full cost of paying off the principal and interest is unclear. Ask the lender for documentation on how much this total expense will be for your loan.

Is it Secured or Unsecured?

A secured loan has something of value that serves as collateral, or a guarantee, that you’ll make good on the loan. For example, a car loan is secured by the car itself. The lender can legally take the car from you if you don’t make payments. An unsecured loan has no such provisions.

How Long do I Have to Pay Off the Loan?

The time it takes to pay back the loan, also known as the term, varies widely depending on what type of loan you’re taking out. Keep in mind the faster you pay back the loan, the less interest you’ll pay.

Are There Prepayment Penalties?

To offset the lost revenue from people paying off their loans early, some lenders will charge a fee for paying off your loan before the initial timeframe in the loan paperwork. If you’d like to have the flexibility to rid yourself of remaining payments with an early payoff, avoid products featuring these types of fees.

Is There a Grace Period for Payments?

The grace period for a loan is the amount of time before you’re required to start making payments. For example, with some federal student loans, there’s a 6-month timeframe after graduation before you must begin making payments. Remember that you might still accrue interest on the debt during the grace period.

Will Payments be Automatically Deducted?

The easiest way to not miss any payments is to set up an automatic withdrawal of your loan payment each month. If you prefer to make the payments yourself, have calendar reminders set up to stay on top of your obligation. Which leads to…

When are Payments Due?

For some types of loans, you can choose a monthly due date. If so, pick a time each month when you know you’ll have the funds available. If the lender assigns a due date, put a plan in place to ensure you’ll have the necessary money available at that time.

What are the Fees for Taking Out a Loan?

Your best tactic is to ask for a detailed listing of any fees associated with the loan upfront. Pay special attention to any application or origination costs.

Does the Rate Change?

Some loans have fixed rates, while others can vary over time. With a fixed rate, you always know how much interest you’ll pay monthly. With a variable rate, your payment could change based on the underlying calculation the lender is using.

What are the Late Fees?

When taking out a loan, the idea of not paying it back is probably the last thing on your mind. But it’s important to know the consequences of a late payment. Financial emergencies happen to just about everyone at one time or another, so a loan with especially tough late fees can cause a downward spiral if you run into trouble with your cash flow.

Are there Deferment Options?

A loan going into deferment means payments are suspended for a certain period. While you don’t want to rely on deferment going into an agreement, a loan that gives you more payment flexibility can be more attractive than one that doesn’t. It’s essential to remember that interest may continue to build up while loans are in deferment, increasing the total cost of paying back the debt and potentially making it more challenging to pay off in the long run.

Are there Usage Prohibitions?

Some loan agreements include language limiting what the borrowed money can be used for. For example, sometimes you’re not allowed to use the lent money to invest.

Many significant life dreams start with a loan, whether for education, starting a business, or securing a home. Knowing ahead of time what you’re getting yourself into can help keep that dream from turning into a nightmare.

RGCU Financial Coaching

Do you want more details about loans and your unique financial situation? RGCU offers free financial coaching. Our certified coaches can meet with you 1-on-1 and help you understand your loan options, your credit score, and answer any financial questions you may have.