The Substance of a Loan
Whether you need a loan only occasionally or borrow on a more regular basis, you'll be concerned with the same basic subjects:
- The amount you'll be able to borrow
- How long you'll have to repay
- What the finance charge will be
Other loans have built-in terms, or time frames. Car loans rarely last for more than five years, in part so that the vehicle hasn't outlived its usefulness before it's paid off. But what limits the interest rate you pay is the competition. If lenders want your business, they offer rates similar to or lower than what other lenders are quoting.
THE LOAN AGREEMENT
Some lenders have rewritten their loan agreements in recent years to make them more easily understandable. And the loan officer you work with should be willing to answer your questions before you sign. You should never hesitate to ask for clear explanations.
HOW MUCH CAN YOU BORROW?
Usually you request a specific loan amount. The lender can approve it, reject it, or offer you a smaller amount. Sometimes you need to apply to more than one lender to find one who will approve your request. You may have to pay an application fee each time.
HOW MUCH WILL IT COST?
Sometimes lenders are eager to lend, and offer lower rates or waive the fees. While you probably can't time your need to borrow to coincide with those occasions, some borrowers apply for home equity lines of credit when lenders promote those loans at a reduced upfront cost. Then the money is available if it's needed, but there's no charge unless the line is used.
You may also be able to get a preferred customer rate, or a small discount on the interest rate, if you maintain a savings or investment account with the lender.
WHEN DO YOU HAVE TO REPAY?
In some cases, including some college loans, you may pay only interest for a specific period and then begin to repay the principal. In others, you pay only interest for the term of the loan and then repay the entire principal in a lump sum. Most lenders allow you to prepay a loan at any time. Some charge a prepayment penalty, usually about 2% of the amount borrowed, although many states prohibit this practice.
WHAT IF YOU DON'T PAY ON TIME?
Lenders may also impose a stiff penalty if you default. And, if they hire a collection agency or lawyer, you'll have to pay for those services, too.
Another way lenders can collect if you default is by setting off, or taking the amount you owe from any checking or savings account you have with the lender.