I’m not sure that anyone likes getting into debt, but in many instances, it’s inevitable. After all, few homebuyers can afford to purchase a new house in cash, and the vast majority of drivers finance their car purchases. And don’t even get me started on paying for a college degree.
Anytime you’re planning to take out a loan, you need to ensure that you are informed. This means reading your contract thoroughly, in addition to asking some very important questions of your lender.
How long will funding take?
Whether you’re taking out a student loan, auto loan, home mortgage, or personal loan, it’s important to know how long the process will take. There are many factors that go into your funding timeline, but your lender should be able to give you a general idea of when you can expect your funds in-hand.
This allows you to plan for your big purchase accordingly.
Are there application or origination fees?
Some lenders will charge you a one-time fee just for considering and processing your application. These fees, which include application and/or origination costs, can quickly add up, so it’s important to see if they’ll be charged on your own loan.
In some cases, these fees will be due upfront. Other times, you may be able to just roll them into your loan.
Is a down payment required?
Most home buyers already expect that a down payment is (almost always) required when they take out a mortgage. But you may also need to put down funds for other types of funding, such as an auto loan.
Be sure to ask your lender how large of a down payment is required, what options are available to you, and whether there are any fees (or increases in your interest rate) if you reduce the down payment amount.
What is my interest rate? My annual percentage rate (APR)?
Your interest rate tells you how much you are essentially paying your lender for the convenience of borrowing their money. It’s, in essence, your fee for the loan–so knowing what your interest rate is set at is imperative.
Additionally, you will want to ask what your APR, or annual percentage rate, is on your loan. This may or may not be the same as your interest rate, which is why it’s important to ask.
An APR accounts for a loan’s total annual cost. This includes your interest rate as well as any fees and added costs; if your loan doesn’t have any charges outside of interest, the APR and interest rate will be the same. If your loan has added fees, however, you will see a difference between the interest rate and the APR.
Is my interest rate fixed or variable?
Some interest rates are fixed: the rate stays the same until your loan is repaid, no matter what. Other interest rates are variable, which means that they can change according to fluctuations in the federal reserve rate.
Fixed rates offer stability and predictability, but this often comes at a higher cost (in the form of a higher rate). Variable rates are usually lower, but can fluctuate — in either direction — without warning over time.
Can I reduce my rate?
There are a few ways you can reduce your interest rate, depending on the type of loan you’re taking out.
One of the easiest ways to drop an interest rate is to add a co-borrower, such as a creditworthy spouse or parent. When taking out a home mortgage, you may also be able to buy points, which allow you to pay a fee in order to drop your rate.
Are rate discounts offered if I make automatic payments?
Many lenders will offer discounts in exchange for setting up automatic payments on your loan. Often, you’ll find that you can snag a 0.25-0.50% interest rate reduction just for using autopay.
Just be sure to ask what your baseline rate is and what your discounted rate is; many lenders will show you an initial rate that already includes an autopay discount, when you’re first shopping around for your loan.
Is there a flexible payment schedule?
The flexibility of your payment options will depend on your lender as well as the nature of your loan.
Many lenders offer flexible repayment schedules, allowing you to choose the repayment term of your loan (think choosing a home mortgage with 15-, 20-, or 30-year terms).
Some will allow you to alter your repayment schedule as needed over the course of your loan, too. For example, you may need to go interest-only at some point or even skip a payment if you hit a rough patch.
Can I customize my due date?
There are many reasons you may want the option to set your own payment due date.
Let’s say you get paid twice a month, with a payday on the 1st and another on the 15th. If your home mortgage, car payment, student loans, and electric bill all came out on the 1st, it could be detrimental to your cash flow.
By choosing the due date on your new loan, though, you can spread out your payments to better balance your budget.
Will I be penalized if I decide to pay off my loan early?
If you decide to pay off your loan early — either in the form of additional payments over time or one lump sum payment — you can save yourself a lot of time and money. But if your lender charges an early repayment (or prepayment) penalty, it could also cost you.
Be sure to see what, if anything, your lender charges for early repayment. If you think there’s any chance you will want to pay down your loan a little extra (or entirely) a little early, these fees could impact your decision.
What other fees or could I be charged?
Ask questions and read all of your loan documents to ensure that there aren’t any surprise expenses along the way. These could include:
- Late fees
- Processing fees (especially for a mortgage loan, such as title search, escrow settlement, etc.)
- Returned check fee
- Check or phone payment processing fees
There are other fees that you may encounter, so be sure to ask and read all of the fine print… twice!
Borrowing funds from a lender is not only helpful, but imperative. Whether you’re looking to buy a car, buy a home, fund an education, pay for a large purchase, or refinance existing high-interest debt, the right loan can make all the difference.
Educating yourself and knowing what to expect from your loan is key, though. It’s important to understand what the debt will cost you, both upfront and over time. It’s also important to understand how your loan works and what the repayment process will be.
By asking your lender as many questions as possible — including those mentioned here — you will be both an informed and budget-savvy borrower!