How Much Does Your Personal Loan Cost?

FinanceLoans / Lease

  • Author Michael Strauss
  • Published April 18, 2007
  • Word count 660

A personal loan is a big commitment for your financial future, one that you'll be living with for years. If you choose the wrong loan package, then the effects will be felt for the full length of the loan term, so it's obvious that you need to take care when deciding which loan to apply for, and from which lender.

It's also obvious that getting the cheapest loan possible should be a priority, but how can you properly compare the costs of loans? The first factor that most people look at when determining how expensive a loan or other form of credit is is the APR, or Annual Percentage Rate. This is the interest rate that will be charged on a loan, and the higher the figure, the more expensive the loan.

Although the APR figure is intended to give an accurate picture of the overall costs involved, there are several different ways of calculating it, and so when you compare the APRs of two loans side by side, you might not actually be comparing like with like. Because of this, you should also take a look at the other factors involved in how cheap or expensive your loan will be.

One major thing to look out for is whether the lender or broker will charge an arrangement or setup fee. This is a one off charge which is made when your loan application is approved and completed, and the fee is usually added on to the loan balance and repaid over the term of the loan. This means that not only do you have to pay the fee itself, but also interest, which will make it even more expensive than it initially looks. Arrangement fees are common on secured loans and mortgages, far less so on unsecured personal loans.

The length of a loan term will also have a major bearing on the cost of any loan. While a lower interest rate might be attractive, a low APR over a long term may actually lead to more interest being paid overall than a higher interest rate over a shorter term. It's usually a trade off between a lower monthly repayment and a lower overall amount of interest paid - the choice is yours.

Many loans and mortgages feature something called an early repayment penalty or fee which is charged if you clear your loan before the originally agreed term. It is usually expressed as a percentage of the outstanding balance, and is most commonly found in loan products that feature an initially discounted rate, or a long term fixed rate, and is put there by the lender to discourage borrowers from taking advantage of an introductory deal and then immediately switching to a new loan, so costing the lender money in terms of lost interest charges. The period in which an early repayment fee may be charged is usually limited to the first few years of your loan, and will be made clear on the loan agreement before you sign.

Even if there is no early repayment charge, many loan companies will charge an 'exit fee' of a few hundred dollars if you repay your loan early, perhaps as part of a debt consolidation program. This fee is intended to reflect the administration costs involved in closing your account, but recently there are suspicions that it has come to be seen as another way for lenders to squeeze a little extra profit from the loan.

Finally, one thing to beware of when taking advantage of the payment holiday option available on some loans is that although you don't have to make a repayment that month, interest will still be charged on the balance - so in effect you're paying double interest for that one repayment. If you use this option a lot then, over the term of the loan, the effects could add up to produce a substantially higher APR than that quoted when you took out the loan.

Michael writes for the personal loans site Loan Time, where you can get information on all kinds of finance from tenant loans to secured and unsecured credit.

Article source: https://articlebiz.com
This article has been viewed 1,096 times.

Rate article

Article comments

There are no posted comments.

Related articles