What To Look For In A Loan

Loans are different from credit.

A loan actually transfers the full amount of money. A mortgage is a common type of loan. Loans usually have a lower interest rate than credit. A good loan has a specified and predictable cost. In many cases the loaner expects to be paid at a set rate (say, $100 a month) that may or may not include interest.

Credit is basically an extension to your available cash – a short-term, high interest loan with a different set of terms and conditions. Credit typically runs in a billing cycle of 30 days or less. Payment outside this billing cycle can result in interest and finance charges that can ruin you.

There are, of course, many exceptions to the above. Things like credit card arbitrage can blur the lines between credit and loan.

Here’s what you want to look for in a good loan:

Good Reputation

There are certain financial institutions that I love doing business with. They have earned a good reputation with me. When I try out a new financial institution, I check with some of their existing customers in good standing. Then, when I go in, I want to truthfully tell the loan officer, “I’m here because Jane Doe and John Customer, both long-standing customers of your company, recommended you. They both spoke very highly of your reasonable terms and excellent customer service.” The reason is simple: If they act like jerks, not only will it cost them me as a customer (see No penalty for early payment below), but I will let Jane Doe and John Customer know how I was treated, and strongly encourage them to take their money elsewhere. I’ll even send the company a letter letting them know that I’m doing this. On the reverse side, if they treat me well (such as waiving a late fee), I’ll send them a thank-you letter, and note on the letter that I’m CC’ing Jane and John.

Low Interest Rate

Good loans have a low interest rate. If the “loan” doesn’t offer a lower interest rate than a credit card for the same amount, it’s not a good loan. If you’ve got good credit and a history of regular payments, the most you should ever pay on a good loan is less than half what your lowest-interest credit card charges (excluding cards that you picked up with special deals). The number that you want to look at for interest rate is APR (Annual Percentage Rate). Do not compromise on this!! If you can’t get a decent interest rate on the loan, then don’t take the loan!

Set Interest Rate

A good loan has a set interest rate. You can look through the news reports for the last 3-6 months and see how many people got burned hard by ARMs (Adjustable Rate Mortgages). You want a loan where the interest rate DOES NOT CHANGE, EVER. If the lending company only offers adjustable rates, walk away. Do not compromise on this!! Uncertainty is the bane of your financial existence. You do not want to end up with an APR that spikes +7%. You must be able to predict your expenses over the life of the loan if you are going to repay it.

No Penalty For Early Payment

A good loan has no penalties, fees, or other problems if you pay all or part of it off early. If you compromise on anything else during the loan process, do NOT compromise on this one. See, this is YOUR fundamental escape clause – your only way out of the loan if things go bad with the financial institution. You do not want to end up in arbitration. You do not want to end up in court. If all else fails, you want to just pay the remaining principal, and walk away.

No Service Fees

A good loan does not have any sort of service, processing, payment, consultation, or other fees. It is straight-forward: You borrow X amount at Y interest for Z years, and pay M money per month. Period. Nothing else.

Accepts Electronic Payments

A good loan will also accept electronic payments, such as automatic bill pay.

Well-Defined Late Payment Policies And Fees

Look, it happens. Everyone screws up eventually. You need to know in advance what will happen, and what to do, when it happens. If the loan does not EXPLICITLY spell out the late payment policies and fees in plain English, with examples, in the contract, it’s not a good loan. The examples are important because they eliminate “wiggle room” in the wording of the contract.

Affordable

If you don’t have a budget, don’t take a loan. If your budget, forecast over the life of the loan, can’t handle at least twice the monthly loan payment, don’t take the loan. Yes, this means you may have to wait on that car or house.

Terms Changes

If the lender can change the terms without giving you at least 30 days (preferrably 60 days) written notice plus an option to pay off the total loan immediately upon your refusal, you don’t want the loan. Period.

Get it for Needs Only

Only get a loan for things you NEED: food, clothing, shelter, health, transportation.

Everything Is Written Down

If it isn’t written down, it doesn’t exist. If the lender just gives you a verbal explanation, but can’t show you EXACTLY where in the loan paperwork that explanation is located, then it’s not valid. You are within your rights to require that the lender show you EXACTLY where in the loan that explanation is, what the words mean, and why it is worded that way. If the lender starts yelling or acting irritated, find a different lender.

Now, in case it isn’t clear:

  • Payday loan companies are a BAD IDEA. Using them will only get you further in debt.
  • Loan sharks are a BAD IDEA, and probably illegal.
  • Loans from family or friends – My advice and experience is that getting a loan from family or friends is a bad idea. But if you do, write up a contract, including a repayment schedule. When you’re starting out with no credit history, it’s really great if you can take a copy of a contract, plus statement, from the friend/family member with you to help persuade the financial institution. Also, your friend/family member is more likely to loan it to you if there is a legally-enforceable contract.
  • If in doubt, contact your State Attorney General’s office and see if they can help. At the very least, they can tell you if they’ve gotten a lot of complaints about the company. You do NOT want to involve yourself with a company that has government lawyers after it. Play it safe – there are plenty of other loan companies out there.
  • Don’t be greedy. If the deal is too good to be true, it means you’re about to get ripped off. If the lender doesn’t have a way to make money off the loan, then you’ve missed something. Start running now.

6 Responses to “What To Look For In A Loan”

  1. PookahBoss says:

    @ Aaron Wakling:
    Thank you very much! I hope that you find the information useful.

    @Dan Waldron:
    I’d love to. My blogroll isn’t set up yet – but I expect to take care of that this month (February). If you don’t see one up with a link to your site, please drop me another comment.

    @Susan Kishner:
    This is one of the default layouts that came with the WordPress installation. I’m afraid that I’m relatively new to WordPress, so I don’t know how to point you in the right direction. I’ll check into it and email you a response.

  2. PookahBoss says:

    Sorry for the delay in getting your comments moderated – Real Life stuck its tongue out here at the end of January.

  3. Where did you get your blog layout from? I’d like to get one like it for my blog.

  4. Dan Waldron says:

    Hi,

    I’m just getting started with my new blog. Would you want to exchange links on our blog-rolls?

    BTW – I’m up to about 100 visitors per day.

  5. You know, I have to tell you, I really enjoy this blog and the insight from everyone who participates. I find it to be refreshing and very informative. I wish there were more blogs like it. Anyway, I felt it was about time I posted, I?ve spent most of my time here just lurking and reading, but today for some reason I just felt compelled to say this.

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