Before taking a loan, you must consider every consequence of debt. Loans are obligations to creditors who expect to get paid the original loan amount plus a percentage of interest, which is their profit for making the loan. Each time you borrow money, you write a new chapter in the story known as your credit history. Borrowing money conservatively, only as needed, helps us develop a strong credit history. Having a strong credit history is one of your greatest strengths when looking for additional borrowing. Obtaining a mortgage, car loan, or other loan, is much easier and is much more advantageous when you have a good credit history and you will get lower interest rates, too.
The good news for consumers is that the lending market is extremely competitive. There are many banks and creditors looking to compete for your business. Generally, this competition causes lenders to provide competitive interest rate products and terms to borrowers. However, you do need to shop around to determine which loan type is best and compare offers from various lenders to find the best rates and features.
Borrow only as needed
Along with borrowing responsibly - that is, only as needed! - consumers need to be prepared to read the small print of various credit products. Lending products often contain credit terminology and explanations that are confusing to the average borrower. Be sure you know what a product is offering before signing an agreement. While most lenders are credible and do want to communicate effectively with borrowers, there is also a good supply of lenders who take advantage of desperate or unsuspecting borrowers by noting hidden charges, penalties or terms in the small print. (Why not check out our ‘Glossary’ for simple explanations to what looks like confusing jargon?)
The dreaded ERC!
Another extremely important and often overlooked aspect of a loan is an early redemption (ERC for short) charge. Early redemption charges are fees placed on a loan offers that penalises borrowers for paying off their loan earlier than expected. Many lenders add these fees in order to protect themselves from lost interest charges when borrowers pay off before the end of the scheduled repayment period. If you are a borrower who likes to eliminate debt as early as possible to reduce interest, watch for these charges.
You also need to ask what arrangement fees you will need to pay. These are upfront fees charged by lenders to process a new loan. Fees are common in larger loans and property loans, but are less common with credit cards and simple loans.
Get clarification on any promotional offers or enticements used to get your business. Some lenders offer payment deferments initially to entice borrowers with the ability to skip months’ of repayment. This is known as a payment holiday. This is all well and good until you realise that, in most cases, the interest accrued on the original loan is earned during the deferment period and added to the subsequent repayment period.
The biggest key for you in order to get a loan that meets your requirements is to carefully shop around and not be hasty in selecting a loan product. Plus..
- Know your goals and choose a loan accordingly.
- Review the features and fine print details of each product. Each loan type has advantages and disadvantages, and each lender offers unique terms and features based on a borrower’s credit history, income, and other considered factors.
