Loans come in many forms – each with their own unique conditions. Some can be more costly and less convenient that they may initially appear. Beyond the monthly repayments, make sure that you’re not overlooking these terms and conditions when applying for a loan.
Variable interest
Loan interest is either ‘fixed’ or ‘variable’. Fixed interest is generally considered the best option, because it means you’re paying the same amount of interest each month, making it easy to budget for each payment. With variable interest loans, the amount can constantly change – which can make payments harder to budget for and potentially unaffordable if interest rates rise dramatically.
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There are many reasons lenders may offer variable interest, but it’s almost always to benefit the lender. Discretionary commission arrangements on PCP loans used to be a common reason, but such commission is now banned, and there are in fact companies that can help you claim back this money such as this Motonovo PCP claims service.
Collateral
Some lenders will ask you to provide a car or house as collateral. This can have some benefits such as lower interest rates and no need to provide a deposit – however if you stop paying the loan, the lender is in their right to seize your car or home from you. This makes these loans a lot more risky.
Such loans that require collateral are known as ‘secured loans’, and typically include mortgages and car finance. Loans that do not require collateral are known as ‘unsecured loans’. This secured vs unsecured loan guide at Investopedia offers more information about the differences.
Origination fees
You may have to pay a fee when applying for some loans. This is known as an origination fee and can be worth anywhere from 1% to 5% of the loan.
Whether your application is successful or not, you will still have to pay the fee. And this is on top of any deposit the lender charges. Therefore, be careful of this upfront cost.
Late payment fees
Many lenders will charge late payment fees if you miss a payment. But these fees can vary from lender to lender.
It’s worth looking into the terms and conditions to make sure that late payment fees aren’t really high. If there’s a risk you may fall behind on payments, things could get very expensive.
Early repayment fees
Every lender should provide the option to pay your loan off early. The best lenders won’t charge you anything if you do pay your loan off early. Others will charge early repayment fees – which could be worth 5% of the remaining loan amount.
You don’t deserve to be penalised for paying a debt off early. So if you think there’s a chance you’ll be able to make an early repayment, avoid lenders that charge an early repayment fee.
Slow approval/processing times
If you need your loan immediately, be wary that some lenders may take several days to approve and process your loan.
Bigger loan amounts will almost always have a longer approval and processing time. However, there are many smaller loans offered by lenders that can be in your account in seconds. Look for these loans if you need access to funds quickly.
Balloon payments
Finally, watch out for balloon payments. This is when a lender offers very low monthly repayments, but then adds a giant final payment on the end.
This balloon payment could be worth 25% to 50% of the loan – so you may end up having to take out another loan just to pay it off! Try to avoid these loans unless you can save up for the balloon payment at the end.
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