Whether you are looking for a home loan, auto loan or personal loan, there are three features you should look at:
A loan is made up of two components: the principal and the interest rate. The principal is the amount you borrow. The interest rate is the amount the bank charges you for borrowing. The interest rate is usually called the APR (annual percentage rate) and is a percentage of the principal. Your monthly payment is applied to both the principal and the interest.
Generally, the higher the APR, the higher your monthly payments will be. Lenders are required by law (Truth in Lending Act) to disclose the APR.
In general, loans with a longer term carry a smaller monthly payment; however, they also carry a higher interest rate and the total amount paid over the life of the loan will be higher than that of a short-term loan. For example, a three-year, $15,000 loan that is lengthened to four years will decrease your monthly payment from $450 to $377. But the interest rate will increase from 5 percent to 9.5 percent. Over the life of the loan, the total amount you pay would increase from $16,200 to $18,096. Short-term plans will mean higher monthly payments, but you will be charged less interest and will pay less overall.
There are usually other fees included in a loan. For example, if you decide to pay off your loan before the term ends, you may be subject to prepayment penalties. You should ask the lender for any other fees included in the loan. Legally, you are entitled to full disclosure. Many lenders offer loans that do not carry a prepayment penalty or other fees, and you should feel free to shop around until you get the best loan package.
Now that you know what to look for in a loan, you need to know what lenders are looking for in you. Lenders look for the "three C's."
Character: The lender wants to know that you are reliable and pay your bills regularly. In other words, lenders want to be sure they get their money back. You will be asked for references or the names of other creditors.
Capacity: The lender wants to be certain you can pay the money back. Is your income enough to pay the debt? What other expenses do you have?
Collateral: Finally, lenders want to be sure that if you don't have enough money, or you lose your job, that they can still get their money back. Do you have sufficient assets? If collateral is not necessary, the loan is called an "unsecured loan."
The purpose of this article is to both provide information and facilitate general dialogue about various employment-related topics. No legal advice is being given and no attorney-client relationship created. Please see the disclaimer for further limitations and conditions.
