The Cost of a Loan
The cheapest loan isn't the one with the lowest payments, or even the one with the lowest interest rate. Instead you have to look at the total cost of borrowing, which depends on the interest rate plus fees, and the term, or length of time it takes you to repay.
WHAT YOU LEARN FROM LENDERS
WHAT YOU LEARN WHEN APPLYING
Every lender is required to provide a total cost disclosure, called a Truth-in-Lending disclosure, before a loan is made. This is the only place where you can see in dollars and cents what the loan will actually cost you.
The disclosure will provide the:
Annual percentage rate, or the cost of borrowing as a yearly rate.
THE COST OF TAKING LONGER TO REPAY The term of your loan is crucial when determining cost. Shorter terms mean squeezing larger amounts into fewer payments. But they also mean paying interest for fewer years, which saves you money. Consider, for example, the interest for three different terms on a $15,000 loan at 6% APR.
|Number of monthly payments|
|Amount of each payment|
|Total interest paid|
Be careful to ask about all fees — they add up very quickly and can substantially increase the cost of your loan. Each type of loan has a different set of fees. Here are some you might encounter.Application fee covers processing expenses. Attorney fees pay for the lender's attorney. Fees for your own attorney are extra. Credit search fee covers researching your credit history.