There are many reasons why people might need to take out a loan. With the availability of online loans, it has never been more convenient to borrow the money you need. Online loans are no different than any other type of loan; you will need to understand it and how you will repay it to avoid creating problems later down the line.
Work Out What You Can Afford
To work out what type of loan you can afford you will need to consider the annual percentage rate (the APR), as well as the total amount repayable (TAR). The TAR includes the total amount borrowed as well as the total amount of interest you will pay off once the term of the loan has been completed. You should consider both the monthly payments and the overall repayment carefully before you take out any loan. You should also formulate a realistic repayment plan that is flexible enough to ensure you can meet your repayments even if some of your circumstances change.
Your Credit Score
Before you take out an online loan, you should know your credit score and credit history. Knowing your credit score helps you to be prepared for the outcome of the loan application, as a poor credit score or credit history is likely to lead to loans being denied or being offered with worse terms.
To receive a good loan, you will need a good credit score. Organisations that do not require a credit score are taking a big risk which is likely to be compensated by other terms of the loan. It is common for short-term loans, such as payday loans, to not need a credit check.
The Exact Terms of the Loan
Before you apply for any loan it is vitally important that you understand the terms. This means that you will need to know the APR, the total cost that you will pay, and all the fees that you will incur. Some traditional loan fees and hidden costs include:
- Loan origination or Loan Processing Fee
This type of fee is most common with mortgages, where you can expect a charge of 1% before you open the loan. However, this type of fee being applied to other types of loans is not unheard of. If you are taking out a personal loan, an auto loan, or any other type of online loan, try to avoid sites that charge you processing fees.
- Failed Payment Fee
Some lenders charge this fee which is applied when you do not have the money to cover the payment you have made towards the loan.
- Prepayment penalty
This fee is applied when you pay off a loan early. Lenders use this clause to encourage you to use the full term so that they can receive the highest amount of interest from your loan.
- Late Payment Fee
This fee is incurred when you miss a payment or if it is late. Not only will you be charged for this, but your credit score will suffer, too.
You should also know what type of interest your loan has: for example, is it compound or pre-calculated interest? You should also be aware of how your interest is calculated: is it on a monthly or daily basis, for example? This PocketSense article offers a comprehensive overview of different types of interest for those unfamiliar with the terms.
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