Essential Questions For Loans: What To Ask Before Borrowing

It’s important to be aware of a loan’s ins and outs before accepting it. Use these key questions for loans to help you understand and compare your options.

In many cases, loans are taken out for important reasons: buying a car, moving into your dream home, or starting your own business. Because of the thrill associated with these life changes, it’s common to want to rush through the process as quickly as possible. However, doing so could cost you big over time and potentially impact other life goals.

By thoroughly understanding the loan you are getting yourself into, you gain a better perspective of the expectations you are agreeing to. Be sure to review these key details before accepting a loan:

• What kind of credit score should I have?
• How much am I borrowing?
• What’s the monthly payment?
• What’s the APR?
• How much total interest will I pay on the loan?
• Is it secured or unsecured?
• How long do I have to pay off the loan?
• Are there prepayment penalties?
• Is there a grace period for repayment?
• Will payments be automatically deducted?
• When are payments due?
• What are the fees for taking out the loan?
• Does the rate change?
• Are there late fees?
• Are there deferment options?
• Are there usage prohibitions?

Let’s dive into some of these in greater detail.

16 Questions For Loans

It’s not always easy to know what questions to ask when going through the loan process, especially if you’re unfamiliar with the terms and requirements. It can feel overwhelming with so many details to consider, like interest rates, repayment terms, and hidden fees. Asking relevant questions can help you decide on a loan that best fits your needs.

1. What Kind Of Credit Score Should I Have?

The first factor to consider is whether your credit score is high enough to qualify for the loan. The second is whether you could save money by increasing your credit score. For example, a lender may give you a rate of 8% if your credit score is 620 but a rate of 7% if your score is 720.

Many credit unions, banks, and credit card companies now give out free credit scores, so take advantage of that if possible. If you don’t have a free service available, you can visit myFICO to purchase the scores most often used by lenders. Should you have questions or want to learn how to address your credit score, BALANCE counselors can help.

2. How Much Am I Borrowing?

The principal, or the amount you’re borrowing, seems like a basic consideration, but people can sometimes get confused between a loan and a line of credit. With a loan, you’re borrowing a set amount of money at one time. With an open line of credit, you can borrow up to the limit, pay down the balance and then continue to borrow more.

Knowing exactly how much you want to borrow before talking to a lender makes the process smoother and helps you get the right loan options. It also keeps you from borrowing more than you need or asking for an amount that doesn’t fit your finances.

3. What’s The Monthly Payment?

While you may qualify to borrow a certain amount, remember that that doesn’t necessarily mean the monthly payment will fit into your budget. Before you take out a loan, find out what your monthly payment will look like and whether that fits into your spending and savings plan.

4. What’s The APR?

The APR, or annual percentage rate, is the amount of interest you’ll pay to borrow the money. It’s also called the interest rate, or sometimes just the rate. With any loan, shopping around to find the lowest rate you can is a good idea. Just make sure the lender isn’t offsetting a low interest rate with higher-than-average fees.

5. How Much Total Interest Will I Pay On The Loan?

Unless you’re a math wizard, you’ll come across some loans where the full cost of paying off the principal and interest is unclear. Ask the lender for documentation on how much this total expense will be for your loan, or use A+FCU’s handy calculators to get an estimate before applying.

6. Is It Secured Or Unsecured?

A secured loan has something of value that serves as collateral or a guarantee that you’ll make good on the loan. For example, a car loan is secured by the car itself. The lender can legally take the car from you if you don’t make payments. An unsecured loan has no such provisions.

Other examples of collateral for secured loans include homes for mortgages and savings accounts for certain personal loans. If you don’t make payments, the lender can take the asset to cover their losses. On the other hand, unsecured loans, like personal loans, don’t require collateral, but they often come with higher interest rates since the lender is taking on more risk.

7. How Long Do I Have To Pay Off The Loan?

The time it takes to pay back the loan, also known as the term, varies widely depending on the type of loan you’re taking out. Keep in mind the faster you pay back the loan, the less interest you’ll pay.

Loan terms can range from just a few months to several years, depending on the type of loan. Shorter terms usually mean higher monthly payments but less interest paid overall, while longer terms lower the monthly cost but increase the total interest. Finding a balance that works for your budget while keeping interest costs manageable is important.

8. Are There Prepayment Penalties?

To offset the lost revenue from people paying off their loans early, some lenders will charge a fee for paying off your loan before the initial timeframe in the loan paperwork. If you’d like to have the flexibility to rid yourself of remaining payments with an early payoff, avoid products featuring these fees.

9. Is There A Grace Period For Repayment?

The grace period for a loan is the amount of time before you’re required to start making payments. For example, with some federal student loans, there’s a 6-month timeframe after graduation before you must begin making payments. Remember that you might still accrue interest on the debt during the grace period.

10. Will Payments Be Automatically Deducted?

The easiest way to not miss any payments is to set up an automatic withdrawal of your loan payment each month. Ask about possible benefits, such as an interest rate reduction. If you prefer to make the payments yourself, have calendar reminders set up to stay on top of your obligation.

11. When Are Payments Due?

For some types of loans, you can choose a monthly due date. If so, pick a time each month when you know you’ll have the funds available. If the lender assigns a due date, put a plan in place to ensure you’ll have the necessary money available at that time.

12. What Are The Fees For Taking Out The Loan?

Loans often come with fees, so asking for a breakdown before committing is important. Common fees include application fees, origination fees, and sometimes prepayment penalties if you pay off the loan early. Knowing these costs upfront helps you avoid surprises and compare different loan options more accurately.

13. Does The Rate Change?

Some loans have fixed rates, while others can vary over time. With a fixed rate, you always know how much interest you’ll pay monthly. With a variable rate, your payment could change based on the underlying calculation the lender is using.

14. Are There Late Fees?

When taking out a loan, the idea of not paying it back is probably the last thing on your mind. But it’s important to know the consequences of a late payment. Financial emergencies happen to just about everyone at one time or another, so a loan with especially tough late fees can cause a downward spiral if you run into trouble with your cash flow.

15. Are There Deferment Options?

A loan going into deferment means payments are suspended for a certain period. While you don’t want to rely on deferment going into an agreement, a loan that gives you more payment flexibility can be more attractive than one that doesn’t. It’s essential to remember that interest may continue to build up while loans are in deferment, increasing the total cost of paying back the debt and potentially making it more challenging to pay off in the long run.

16. Are There Usage Prohibitions?

Some loan agreements include language limiting what the borrowed money can be used for. For example, sometimes you’re not allowed to use the loan proceeds to invest.

Business loans might require that funds be used only for company expenses, while student loans must go toward education-related costs. It’s important to read the terms carefully to ensure you’re using the loan as intended since misusing funds, even accidentally, could lead to penalties or even default.

Personal Loan Considerations: What You Need to Know

Taking out a personal loan can be a helpful way to cover expenses like home improvements, medical bills, or debt consolidation. These loans typically come with fixed or variable interest rates and are repaid monthly over a set period of time.

Before borrowing, it’s important to consider factors like interest rates, loan terms, fees, and whether the loan is secured or unsecured. Your credit score and income will also impact your eligibility and the rate you receive. Comparing different lenders and understanding the total cost of the loan can help you make a smart financial decision. Always make sure the monthly payments fit within your budget.

Debt Consolidation Loans: Are They Right For You?

Using a loan to consolidate debt can simplify payments and lower your interest rate, making it easier to manage what you owe. By combining multiple debts into one loan, you can replace several monthly payments with a single fixed payment.

However, it’s important to compare the new loan’s terms, like interest rates, fees, and repayment period, to ensure it saves you money in the long run. If the new loan has a longer term, you might pay more in interest over time, even with a lower rate. Additionally, taking out a consolidation loan doesn’t erase your debt, so responsible budgeting is still key to building a financially secure future.

Summary

Many significant life dreams start with a loan, whether for education, starting a business, or securing a home. To make an informed decision and avoid surprises, it’s best to familiarize yourself with the loan’s ins and outs.

A+FCU Can Help You Find The Right Loan

At A+FCU, we’re here to help you find a loan that fits your financial goals. Whether you need a personal, vehicle, or home loan, we offer competitive rates and flexible terms to match your needs.

To make the process easier, we provide free financial calculators so you can estimate monthly payments, compare loan terms, and see if debt consolidation makes sense for you. These tools give you a clearer picture of what to expect before you borrow.

If you’re unsure which loan is right for you, our financial experts are ready to offer personalized guidance. Whether you’re making a big purchase or refinancing debt, A+FCU is here to help you every step of the way.