One of the most important areas of personal finance that many people might not be as comfortable with is borrowing money. Most people will take out a loan for one thing or another during their lifetimes. This might be a student loan, personal loan, car loan, or it may be a home mortgage. Here’s what to know about loans before you take one out.
The interest rate that a bank is willing to give a borrower is a direct impact on the cost of the loan. For example, those who have a $100,000 mortgage at 6 percent would pay a little less than $6,000 in interest alone during the first year of the loan. If the interest rate were to drop to 4 percent, the same mortgage would only cost about $4,000 in interest in the first year. Provided the term of the loan is the same, the payment required will be quite a bit less in the second instance.
Payment Due Dates
It’s also very important to pay attention to due dates. Depending upon the terms of the loan, there may not be a grace period associated with the loan. This means that these loans will need to have payment remitted by the due date. There are a few different methods that borrowers can utilize to pay a loan back. There is the old-fashioned option of buying a stamp and an envelope to mail in the payment. A borrower could also walk into a bank or credit union and make the payment. It’s also possible to set up payments automatically through a checking account. With this in mind, it’s a good idea to only work with lenders like Blue Trust Loans who provide a way to pay directly online. In today’s highly digital and highly mobile world, this helps ensure payments are made on time no matter what.
Failing to pay by the due date can come with some pretty hefty penalties. For example, many credit cards can come with a $29 or $39 fee each time that a payment is late. In some instances, the penalty could be more than the actual bill. Additionally, payments that reach more than 30 days late can lead to a negative mark on a person’s credit report. This could wind up costing a person even more. Rather than getting a good interest rate, the bank would view a person with late payments as a bigger risk, and this would lead to a higher interest rate, which means higher borrowing costs.
This is that date that a person could expect to pay off their loan if they made only the minimum payment each month. For example, a 30-year mortgage taken out in 2012 would have a payoff date sometime in 2042, depending upon the specific date that the borrower took out the loan. Most loans will permit borrowers to prepay. This could make the payoff date vary by quite a bit. For example, if a person decided to pay off their mortgage in cash tomorrow, that would be the new payoff date. Some loans that do not allow for prepayment will charge penalties for paying early. A borrower who wanted to prepay in this instance would have to weigh their options based on the math specific to their situation.
Understanding debt is an important part of financial literacy. Those who understand leverage can avoid getting in over their heads. Those who do not understand debt can wind up getting into a number of problems when it comes to finances. It’s important to borrow only what you can reasonably afford to pay back. That way, you’ll be able to access better interest rates and pay less over time.