Whether you’re financing a home, or looking to purchase a new vehicle, choosing a loan is a big commitment that shouldn’t be taken lightly. When shopping for a loan, first determine the amount of money you’ll need to borrow and whether you can afford the monthly loan payments, or not. By understanding the loan options that are available to you, you’ll have the ability to choose the right loan that allows you to repay the balance at an affordable rate.
Fixed Vs. Variable Rates
After you’ve determined the amount of money you want to borrow, choose either a fixed interest rate, or a variable rate for your loan. With fixed rates, the rate set for your loan will never increase with market fluctuations and you know exactly what you’re going to pay every month for the life of the loan. On the other hand, variable rates can decrease if market rates drop, but the rate can also increase, which could result in an adjusted monthly payment you can’t afford to pay. Although a variable rate can certainly save you money if rates drops, there is a far greater risk of losing money.
Secured Vs. Unsecured Loans
Secured loans are available for borrowers looking to buy a house. The term “secured” simply means the bank uses your home as an asset against the debt of the loan. In other words, if you fail to repay your loan every month, the bank will seize your house. Unsecured loans, or personal loans, usually command higher interest rates because the lender assumes a greater risk, unless you make a down-payment. Secured loans make sense for large purchases, such as a house, that will be repaid in the long-term. These loans have lower interest rates. Unsecured loans are not a good choice for long-term loan commitments because the interest expenses will be too high, unless you can afford to repay the loan early.
Early Repayment Penalty
Repaying your loan early is a fine accomplishment, but some lenders charge fees for doing so. The cost for a repayment penalty is usually equivalent to two month’s interest. Typically, the earlier you repay the loan, the greater the cost in fees. If you intend to repay the loan early, it’s important to choose a loan that won’t subject you to an expensive penalty. Repaying a loan early should never cost you money.
Fiona Harris is a freelance finance writer, specialising in finance and green energy. Her articles regularly feature in a number of UK blogs. You can email Fiona at [email protected]