At some point in your life, you will probably find yourself in a situation where you will be borrowing money. When it come to things like mortgages, car loans, credit cards, home equity loans, or just general purpose loans, there are things you need to consider before applying,
Check the Offers
Before applying for a loan (especially a mortgage loan), compare, compare, compare! Pay especially close attention to any fees, rates, prepayment penalties, and terms. One hour of research may save you thousands of dollars when borrowing money. Do not apply for anything until you fully understand the offer. Keep in mind that any time your credit is checked for a loan/credit application, it will count as a hard inquiry on your credit report. To many of these will drag your score down needlessly so don’t start applying for a bunch of offers randomly.
Some points to keep in mind:
- Always try to beat 13% APR. Usually you can beat it by a lot if you keep your credit good!
- Pay close attention to the Annual Percentage Rate (APR). The APR being offered is extremely useful as a comparison tool since this can vary between multiple offers.
- Watch out for exceptionally “low” or “no interest” offers. Pay close attention to the “fine-print” terms and costs. Beware: artificially low rates are often offset by increases in other costs.
- Each state has different laws about interest rate ceilings. Check your state to see what the maximum interest is that can be charged.
- Easy loans, such as title loans, are available with outrageous costs. Avoid them like the plague! If you are in a situation where you are willing to risk your vehicle in exchange for borrowing money, you probably need to take a hard look at your finances. Be absolutely certain you can pay the loan back before taking it otherwise you will likely find your self in a much worse position than when you started.
Now That You Picked a Loan Offer
Don’t sign false statements, even simple ones like stating you intend to live in a home you don’t intend to live in.
When signing documents, understand what and why you are signing. Don’t sign it if you don’t agree to it. Take your time. If someone tries to rush you through signing documents tell that person to slow down. Plan on taking at least an hour to wade through something like a mortgage loan closing. Smaller loans will not take as much time but you still need to read the fine print carefully before signing. Borrowing money is not something you can rush through.
If consolidating debts using a loan, expect delays, and keep all other obligations current. It is much easier to get a refund of an overpayment than to suffer from increased charges resulting from delinquency.
Home Equity Loans
When considering taking out a home equity loan, beware of advertisers’ claims:
- “Cash out your equity” also means: get deeper in debt, risk losing your home.
- “Put your equity to work” also means: get deeper in debt, risk losing your home.
- “Pay off high-rate credit cards” can mean: Lose your equity and jeopardize you home because you goofed up and ran up credit card debt.
- “Unlock your home equity with our credit card” means: Get deeper in debt & risk losing your home with an incredibly easy way to spend money.
- “Refinance and save” usually means: lose equity and pay us more interest.
Refinancing Existing Mortgages
Refinancing a mortgage loan can be great if:
- The interest rate of the new loan is significantly less than the old one.
- The total of payments of the new loan is significantly lower than the old one.
Refinancing a mortgage loan can be a disaster if:
- Your equity gets eaten up by fees.
- You run up new debt because your consolidated payment is lower.
- You jeopardize your home by adding credit card debt to your home loan.
- Some lenders love to put your equity into their pockets thru fees, interest, and prepayment penalties so check that fine print.
Be Careful of Scams
Don’t fall for scams. Popular scams include: lotteries you’ve never entered, phony cashier’s checks to pay you, tricks to get your account numbers or social security number and using your identity, investment scams (especially when they involve you mortgaging your home to invest), letting someone else use your good credit rating to buy homes, etc.
Once You Have Your Loan
Pay early or on time to avoid late fees. Late fees can change a loan with a reasonable rate to one of an outrageous effective rate! Consider yourself late if you aren’t early.
To avoid bad credit, always make your payments before they are due. Bad credit is not only expensive because of late fees, but it is also expensive because of increased cost of future debt.
For the Future
If you aren’t in the habit of paying off your credit cards each month, get in the habit!
When you do pay off your cards each month, you pay no interest. If you’re accustomed to the dangerous reasoning “I still have unused limit”, get over it! Use the wise reasoning: “I don’t charge things with my credit card unless I have the money lined up.”