Philadelphia, PA - Unless you have a sizable trust fund to take care of things, taking out a loan is often an unavoidable part of modern life, one that opens many new doors and avenues that were previously out of reach for middle-class families. From a student loan that unlocks opportunities to a home loan that makes ownership possible for young adults, a loan can be a great way to use leverage to your advantage and gain a leg up in life.
With that said, however, navigating the process of getting your first loan can be quite daunting, especially when it comes to understanding the various complex terminologies and conditions imposed. In this article, we aim to make this process as simple as possible for you.
Start With The Why?
So, before you even consider going for a loan, it is essential to get your goals, objectives, and broader intentions out in the open.
Why exactly are you borrowing, and what is your likely endgame? In the case of a car, make sure to give due consideration to the time and money you are set to save by going for a car, and how it factors in with the going rate of interest and your monthly payables.
The same is the case for home loans and student loans. By putting all of this down on paper, you are ensuring all essential factors are considered, and there is no oversight, or letting your emotions get the better of you, resulting in a lasting financial mistake.
Having a clear understanding of this ‘Why’ further aids in the understanding of various terms and conditions we cover below, and how each of them relates to your own goals and financial situation.
Interest Rates & APRs
When it comes to home loans, student loans, and all things pertaining to borrowing, the key figure is the rate of interest or the annual percentage rate (APR).
This is the rate charged on the amount you borrow by the bank or financial institution, and is what you will end up paying on top of the total borrowed amount, compounded by the term of the loan, but before other fees and charges are added.
The rates and APRs are the starting point for even choosing the right loan or lender to apply to. There are plenty of comparison tools and platforms off-late to help you with this, such as credito.com.mx, which offers comparisons of top credit cards in Mexico, but remember, rates are just the beginning, there are a host of other factors to consider before you narrow down your choices.
The interest rates often vary based on a number of factors, ranging from supply and demand, business cycles, and most importantly the monetary and fiscal policies of the nation. Lock-in an APR when rates are low, and you stand to gain substantially. Miss out on these opportunities, and you leave value on the table.
Loan Terms & Payback Schedules
The term of your loan is basically how long you have to pay back the money. Shorter terms generally mean higher monthly payments but less interest over the life of the loan.
In the case of longer terms, however, monthly payments are lower, but more interest is paid over time. This is not that different from sprinting and marathoning. Sprinters pay off their debt fast, saving substantially on interest expenses, marathoners on the other hand might get more winded (financially speaking) by the end.
It all comes down to how you plan to allocate your resources between different alternatives. For example, it makes sense to go for a longer term when borrowing money for a rental property, so that you can maximize your cash flows, which can in turn be deployed in other higher-yielding investments.
Fees, Penalties & Other Charges
In addition to the interest rate or APRs, loans come with a slew of other fees, penalties, and charges that take most borrowers by surprise. Often hidden in the fine print of loan documents, these insidious charges can add up and cost you quite a lot over the course of the loan term.
This includes the origination fees, that is the cost of processing the loan itself, followed by prepayment penalties, which are incurred when you choose to pay back the loan ahead of time, and finally the penalties for being late on your monthly payments, which can be substantial.
In addition to this, there is the insurance that the bank often takes on the primary borrower, in case they die before they pay back the amount, the premium for which must be borne by the said borrower. All of this, as mentioned above, can become significant.
Co-Signers
If you don’t have much in the way of assets, or a credit history to support your loan application, lenders might require a co-signer, who essentially takes on the responsibility of paying back the loan if the primary borrower fails to do so.
Having a co-signer on board makes lenders more likely to approve your application, and can even result in better terms and rates.
However, you need to be aware of what a big ask this is, for anyone willing to be your co-signer, and the responsibility that is now on your shoulders to pay back diligently. Most people are rightfully wary about using a cosigner, but at times, there can be no other option but to use one.
Conclusion
Taking on your first loan is a big step, but one that truly marks your arrival into adulthood. There are plenty of challenges and documentation that might seem daunting, but once you get through it, you will be able to see through the web of the modern financial system in an all-new light.
In this article, we’ve offered you a brief primer on the different terms, conditions, and other nuances you can expect while applying for a loan, but make sure to dig a little deeper into each one, as you navigate through this process.
