Today, getting a loan is very easy because there are so many companies that offer loans to more people at great rates. But deals that look too good to be true often have hidden fees that make the loan cost much more than you might have thought. If you know about the dangers of these hidden fees, you can easily avoid them and get a loan that is cheap and fair.
Not just the APR
When you are looking for a loan, you should keep in mind that the costs of paying it back are more than just the APR, or Annual Percentage Rate, that is listed. There are a lot of other fees you need to think about, and the lender might not tell you about all of them. It helps to know about these extra fees so you can get a loan that fits your needs and doesn't put too much strain on your finances.
Costs to redeem
When you apply for a loan, most lenders won't tell you about redemption fees, but you should know about them if you want to pay back your loan early, which many people do. Many lenders will charge you up to two months' worth of interest if you pay back your loan early. Most of the time, these fees are the same whether you pay back your loan right away or a month early. But as borrowers learn more about what these fees mean, more and more lenders are reducing or getting rid of them. Find out if the lender charges redemption fees before you take out a loan, especially if you plan to pay the loan back early.
Rule 78:
If you want to pay off your loan early, you should keep an eye out for more than just redemption fees. Another charge is called the "rule of 78." This rule is hard to understand, so lenders rarely talk about it. Basically, you have to pay more interest if you pay off your loan early. This interest is worked out on a sliding scale, and its name comes from the fact that it was first made by adding up the interest on the first 12 numbers of a loan for a year. So, the interest you pay will be higher the sooner you pay back your loan. All new loans no longer have to pay this fee, but if you already have a loan, you should check to see if this rule still applies to you.
Loan insurance
Lenders may play the biggest trick on borrowers who don't know it is to just add the cost of loan protection to your payment. Many lenders will just give you a quote that includes the loan protection cover, which can often cost you a lot of money. Also, the lender might include the full cost of the cover at the beginning. This means that any interest or fees are paid on a higher amount than just the loan amount. You should always ask a lender if the quote they gave you includes protection or not. If it does, think about how much you could save if you didn't have the insurance.
Protection is good if you think you'll need it, but there are cheaper ways to do things. Some of the protection clauses may be covered by your current employer, or you can get the same protection from other companies at much lower rates than from the main lender. Making sure you have the right loan insurance for your needs can save you hundreds of pounds in fees. Just remember that once you know about these hidden costs, it's easy to avoid them and find a great loan deal.
