If you take out a loan blindly ignoring these top 5 questions to ask, you might be getting screwed.
When it comes to loans, you should consider yourself at war. In this war, you're the good guy, and banks and lenders are the enemy. Believe me, lenders haven't amassed $3.87 trillion in consumer debt outstanding without treating consumers as though they are enemies in a war. And with that much debt outstanding, its pretty clear that in the debt war, lenders are winning.
When you are faced with having to take out a loan, there are things you need to know to make sure that you are not taking on onerous terms. Loans have nuances, and when it comes to banks, there can be flexibility in loan details of which you may not be aware. Not all banks and lenders operate in the exact same way, but when you are taking out a loan, you need to view it as a negotiation. Ask any question you have, and if you don't like the answer, make them aware. Perhaps two of the most important keys to remember above anything are are these two points: 1. Anyone selling you a loan is earning a commission 2. If you don't get the loan terms you want, there are literally thousands of other lenders you can approach.
To lenders, loans are business, which means that when you are applying for a loan, you are actually selling them a product. Imagine you are a salesperson who sells hammers. Construction companies would be interested in buying from you, because after purchasing the hammer, they can use it to build homes. You would be willing to accept negotiation on their part because if you make the sale, your financial position improves. This is metaphorically identical to applying for a loan. You are presenting a lender with the opportunity to give you money that will grow - in their favor - over time. The growth is fueled by interest payments that you - as the borrower - will repay over time, in addition to the original principal amount.
When you are discussing loan options with a lender, these are the top 5 questions to ask before you take out the loan.
1. Can you get a discounted rate by moving more business over?
Many banks will offered preferred rates to customers who have more business with them than a single loan. Mortgages, investment / retirement accounts, and even day to day banking accounts all add up. If you bring over enough business to a bank, you might cross a threshold in their calculations that entitle you to discounts on loans or no fees on accounts. Either way, by bundling your finances with a single financial institution, you might benefit across your financial portfolio.
2. Are there prepayment penalties?
Even though it might seem like you'll never have any extra money to apply to a loan, you never know. New job opportunities, bonuses or inheritances can occur when you don't expect it. With a sudden infusion of cash, eliminating debt is an excellent idea. When investigating the terms of the loan, understand the prepayment details. If you find there are prepayment penalties, ask the lender to remove them. If they agree, make sure that agreement is written into the document you sign. Verbal agreements to remove prepayment penalties never hold up when the time comes for you to actually prepay the loan. By that time, the person you are dealing with might not even work or the lending company.
3. For a line of credit is there a fee for a property assessment?
Usually, having to pay a fee in order to obtain a loan is an almost sure-fire indicator that the loan is a scam. However, for certain secured loans, like a like of credit backed by your home, it could be that the lender requires an assessment of your property's value to be completed before approving your loan. If they do seek fee payment from you to proceed with the loan application, always challenge them and see if they will waive the fee. If the loan amount is large enough, even a punitive fee of $400 is a drop in the bucket, when you think about the long term. No bank is going to walk away from an opportunity to receive interest payments that will eventually dwarf a $400 assessment fee. Typically, people pay fees like this because they assume they are required. But if you don't ask if the bank can waive the fee, you will never know.
4. Does the rate adjust later?
If you are applying for a loan and making projections of the amount you can afford per payment, you need to be able to forecast your rate. A fixed rate loan is typically the best way to go when attempting to structure a regular schedule of payments to fit within your budget. A variable rate loan would be favorable if you can anticipate future rate cuts that will mean over the long term you pay less in interest payments. Of course, this approach has more risk, because just as rates can go down, they can also go up. But one rate concept you should avoid at all costs it a promotional rate, or a rate that adjusts later in the term of the loan. Once you are used to certain payment amount, it will be a disappointing surprise to discover they increase once the promotional period is over.
5. Does the loan qualify as secured and therefore a better rate?
A secured loan is one where the funds are specifically earmarked for an asset purchase such as a house or a safe investment. By safe, that often means a government-backed investment such as a treasury bill or guaranteed income certificate. It may also refer to an approved mutual fund, which is often managed directly by the lending institution. Secured loans are typically entitled to better interest rates, often either at prime or prime plus a very small percentage increase. Secured loans are considered lower risk to a lender, because if you fail to pay, they can repossess the underlying asset that is securing the loan. Their lower risk is your higher risk, so you need to consider your ability to repay the loan before putting up an asset that may be taken from you if you fail to repay the loan.
Summary
Always remember: debt is war. When you are discussing loan terms with a lender, you're not there to make friends. If you think a question might cause offense, don't hold back: their hurt feelings are not more important than you being aware of critical loan details. And if you find that they are not entirely transparent with the terms of the loan, always be prepared to walk away. There are numerous options when it comes to getting a loan, so do not let anyone paint you into a corner with loan terms you either do not like or do not understand.
What do you watch out for before taking out a loan? Are there other questions you ask lenders before signing on the dotted line?