Know Your Loans
Borrowing money can be a scary proposition, so understanding the structure and details of loans is crucial to providing peace of mind and making the right decision. Loans are structured around the interest rate, fees (origination fees or points) repayment period, and collateral. Loans come in a variety of options – Personal Loans, Auto Loans, and Home Loans, – and depending on the type of loan and the collateral associated with it the loans will have different rates and repayment periods. It is important to note that loans may be listed with rates represented by APR (Annual Percentage Rate), APR is not just the interest rate but includes other fees or costs associated with the loan.
Interest rates are the percentage you will pay on a loan each year; these are set at either a fixed or variable rate at the time that you finalize your loan. A fixed interest rate means that the rate will stay the same through the life of your loan. A variable rate means that your loan may change based on the underlying market interest rates. Intere
Fees are charged when a loan is issued and may be charged again if a loan is defaulted on or is prepaid. The structure of fees on any loan must be investigated, as these fees are the difference between being in over your head and having made a smart decision.
Examples of the way loan providers utilize fees is important to understand and different types of loans have different fees:
Personal loan fees vary based on your provider but in general the loan provider charges you an origination fee and then may charge you a processing fee when they transfer you the loaned money, if you default on the loan they may charge you a default fee as well. Because of all of these fees its very important to understand the APR rate on your loan, as it includes the fees and interest rate on your loan, and not just the interest rate charged.
Home Loans (Mortgages)
Home loans have fees associated with them as well; some of these fees are called points. A point is equal to a fee of 1 percent on the total amount of the home loan. There are three different ways fees may be assessed against your mortgage – 1) Origination Fee – this is a fee that is charged by the lender to cover the cost of making the loan 2) Discount Points – a borrower pays a fee (‘it is also called buying down the rate’) to lower the interest rate on the loan 3) Prepayment Points – this is a fee on the borrower for paying the loan off before a certain date, and is meant to protect the lender from spending time making you the loan and then having you refinance before they can make enough money to make the loan worth their while.
These loans are made for borrowers who want to purchase a car with financing. The lender keeps the car’s title until the borrower completely pays back the loan. The lender sees the car title as the collateral their willing to lend on, your credit will decide the rate they will charge you, and the term of the loan the amount of time you have to repay.
This is the term (length) of your loan and the set amount you are expected to pay each week or month. Depending on the type of loan, the lender will set whether you pay weekly or monthly installments. For example, payday loans may have a weekly installment, while personal, auto, or home loans will have monthly installments.
Collateral is an asset or physical thing that a lender will lend against, i.e. for a home loan a house will be the collateral, for an auto loan a car. A lender may or may not ask for collateral when you borrow from them. Loans that ask for collateral are considered secured while loans that are unsecured do not ask for specific collateral. The loan amount when collateral is required will be based off of the value of the collateral used.