The Total Cost of Borrowing Money
If you’re shopping for a loan, line of credit, or credit card, it’s important to consider all the costs involved — not just the monthly payment. Make sure you know your total cost of borrowing money by looking at these four things:
1. Loan amount
The amount of money you borrow may influence the interest rate, terms available and possible fees you pay over the life of the loan. So, determine how much money you actually need to borrow. A higher loan amount may require a longer term to keep your monthly payments manageable.
Tip: Borrow only what you need. Even if you qualify for a higher loan amount, be careful of over-extending yourself. The less money you borrow, the less you’ll have to pay back.
2. Interest rate / APR
When comparing rates, you will want to focus on the annual percentage rate rather than simply looking at the interest rate. The annual percentage rate (APR) is the amount of annual interest plus fees you’ll pay averaged over the full term of the loan. Focusing on the APR allows you to better compare the cost of borrowing from different lenders, who may all have different fee structures. Look for an account with a low APR – the lower the APR, the lower your monthly payment will be.
Tip: The APR you qualify for is based on your credit history. The stronger your credit score, the better APR you may be able to get from the lender.
Fixed or a variable rate? Loans typically have a fixed rate and fixed term, while a line of credit or credit card usually has a variable rate and a revolving term. Know the pluses and minuses of each:
- With a fixed-rate loan, your interest rate and monthly payment never change. And because the payment includes both principal and interest, your loan will be paid off at the end of the term. Having a predictable monthly payment may make it easier to stay on budget and manage your finances.
- With a variable rate loan or line of credit, your interest rate and monthly payment can change over time. The initial interest rate may start lower than a fixed-rate loan, but can increase over time. So, keep in mind how long it will take you to pay off your debt as changes in the rate could impact your monthly payment.
3. Loan Term
The loan term refers to how long the loan will last if you only make the required minimum monthly payments. When you’re choosing the term, consider its impact to your total interest costs. A loan with a longer repayment period may have a lower monthly payment, but it can also increase the total amount you pay over the life of the loan. If you choose a longer term, remember you can still pay less interest over time by making additional payments toward principal.
Payment terms affect your monthly costs
Loan interest rates, payments, and terms are closely related. Keep in mind that changing or adjusting one of these factors will result in changes to the others.
For example, with a $15,000 loan at 7.75% annual percentage rate (APR), and a payment term of 3 years, you would pay $468.32 per month. But if you changed the term to 5 years, you’d lower your monthly payment to $302.35 per month.
Keep an eye on the total money you will pay back over the loan term (your total cost of borrowing). Most loans allow you to pay more than your scheduled monthly payment. The more money you are able to put toward the principal, the faster you’ll pay off your loan – and the less you will pay in interest.
4. Loan Fees
Check for additional fees and charges that can increase the amount you pay — the more fees, the higher the cost of borrowing. Common fees include:
- Origination fees – the amount charged for processing the loan application and underwriting services
- Prepayment penalty – the fee charged if you pay off your loan before the end of the term
- Annual fees – the amount you’ll pay each year for having the account
- Transfer fees – the fee for transferring your balance from one credit account to another
Tip: Before you transfer a balance from one credit account to another with a lower interest rate, make sure you know what the transfer fee is — and if the APR will jump when the introductory period ends.
Thank you for reading!
Blackrock Investments and Finance, Inc.
direct (951) 963-4023 | cell (626) 731-4485 |fax (626) 529-0850
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