The advent of digital lending services means most people can access the money they need quickly. Banks, credit unions, and alternative lenders all offer streamlined services through online portals. With automation, you can get assessed for pre-approval in minutes.
This ease of access means that more borrowers are looking at more loans. The sheer number of loans from this growing space can make some borrowers confused. Itโs also worth noting that many lenders will work with similar kinds of people but offer different rates and fees.
If youโre thinking about getting a loan, itโs your responsibility to make choices that are right for you. When youโre comparing loans, there are a few key things to look at and understand. Letโs get started!
Interest rates and how they affect repayments
A lower interest rate is always a good thing because it means your repayments will be smaller. Your monthly payments will be lower and place less strain on your budget.
Interest rates constitute the most significant expense when youโre borrowing money. Therefore, they deserve closer attention. Keep in mind that even a small difference in the interest rates between two loans can make a big difference in how much you pay!
For example, letโs imagine two fixed-rate loans with the same 5-year term. The consistencies are as follows:
- Loan Amount: $30,000
- Loan Term: 5 years (60 months)
Now, imagine you see two loans like this but for two different interest rates:
- Loan A:0% annual interest
- Loan B:5% annual interest
We can quickly calculate the costs, excluding other fees, with the fixed-rate loan payment formula:
Image: Finance Formulas
The difference in costs seems low at first but adds up over time. Using the formula, you will discover your necessary repayments:
Loan A (5.0% Interest Rate)
- Monthly Payment: $566.14
- Total Interest Paid: $3,968.22
Loan B (5.5% Interest Rate)
- Monthly Payment: $573.03
- Total Interest Paid: $4,382.09
Loan fees: What are they?
Your interest rate is only the largest part of the puzzle. Before you choose the loan that is best for you, you need to consider the total costs of your fees alongside the interest rates. In extreme cases, a loan with lower interest rates but higher fees can become the more expensive option.
To provide the best overview, we must quickly go over the common types of loan fees.
Origination fees
An origination fee is a simple and common fee for the service of processing a loan. The fee is meant to cover the processing costs including underwriting and funding.
An origination fee is usually a small, percentage-based fee. Typically, it will be around 1% of the loan, wherever an origination fee is charged. But you should be aware that while low origination fees are standard, they can sometimes be as high as 5% or even 10%.
Processing fees
The category of โprocessing feesโ are meant to cover the lenderโs administrative expenses. They can have various names or cover various expenses.
Unlike origination fees, most other processing fees are flat rates. Instead of a 1% rate, you may see a simple flat rate such as $100.
Prepayment fees
Prepayment means paying off the loan in full before the final payment is due.
Some borrowers pay back their loans early so they can free their budget up or save on interest. Lenders still often want a minimal return and donโt want to forgo all their potential revenues from interest repayments.
To meet these goals, lenders can charge prepayment fees. They are charged to you when you pay off the loan early.
Late payment penalties
Lenders often charge flat or percentage-based late payment penalties. You shouldnโt have to pay anything so long as you make timely repayments. But if youโre unsure of your ability to repay perfectly consistently, make note of the late payment charges.
Annual percentage rates
An annual percentage rate (APR) includes interest and mandatory fees and is annualized. This is the clearest upfront picture you will get when comparing loans. The higher the APR, the more you pay.
Of all the comparisons you can make, this is the most direct.
Consumer loans comparison
One of the easiest ways to compare loans is to use a lending platform. You simply provide basic information that qualifies you for pre-approval. Once you provide that information, you will be matched with multiple loan options to choose from.
First, you need to decide what kind of loan you need. Personal loans come in many forms because lenders want to know what youโre using their funds for. For example, common Swedish consumer loans of up to KR 600,000 can be used for anything from a car to wedding expenses.
One common problem that leads people everywhere to take out loans is that there are too many other debts. In Sweden, you can get a consolidation loan that immediately pays off all your other debts. Then, all you need to do is manage the one new consolidation loan you took.
By taking the time to compare your options, you can save a lot of money.
The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any finance decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.
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