Most consumers who get loans rarely ask any questions. They walk in, sign the documents and start making payments. There are things that consumers need to know in order to understand what exactly they are signing. A great number of consumers with loans cannot tell you what their interest rate is or the term of the loan. This is an unfortunate situation that costs many consumers thousands of dollars each year. Here are seven questions that every consumer needs to ask about their loan before signing the dotted line.
What is the interest rate?
Some consumers do not care what the interest rate is as long as they like the monthly payment amount. This is a common mistake made by many consumers each day. Often times, you can get a shorter term and lower interest rate if you are willing to pay a little bit more each month. It may slightly raise your monthly payment, but you could be saving yourself some serious money.
Are there any discounts I can receive on the interest rate?
In this fast pace world, loan officers sometimes forget to apply available discounts to loans. Many financial institutions offer discounts on the interest rate if you have other relationships with them like a checking or savings account, direct deposit, or sign up for automatic payments.
Does this include any add-ons or additional products?
There could be add-ons including extended warranties that will cover the vehicle mechanically for a set period or GAP protection which covers the difference between your loan balance and what the insurance company pays you in a total loss situation. These add-ons sometimes can be beneficial, but you should weigh the costs with the benefits. Just make sure to find out how much each one costs before agreeing to it.
If I pay more than the minimum payment each month, does it go towards principal?
It is good to know that if you want to pay extra each month that it goes towards principle and not against your next payment due. Some lending institutions have default settings that will only reduce your next payment due instead of having the difference automatically apply to principal. This is because as you pay down the principal, you are saving interest. As you save interest, they make less money. So make sure to ask the bank this important question. If the extra cash you throw in each month does not reduce your principal, you should probably put that extra cash towards your credit cards or to loans that any additional payments actually reduce your principal.
Is there any pre-payment penalty?
Sometimes deals can seem too good to be true. This is the case with pre-payment penalties. Pre-payment penalties are fees imposed by the lender if the consumer pays off a loan before a certain time has been reached. This is in place to ensure that lending institutions that have costs associated with making loans get some type of payback on that investment. These kind of fees are especially common if the lender covers your closing costs or in another words if you have a zero-closing-cost loan. Prepayment penalties are good for lenders, but bad for unwitting consumers who try to pay off loans early. If you are faced with getting a loan with a pre-payment penalty, make sure to ask when the provision expires and to explore all other options before signing.
What options do I have if I cannot make one of my payments by the end of the grace period?
It is always good to know how financial institutions handle this situation. The grace period is the period starting when your payment is due and ends the last day you can make a payment without a late fee. Some institutions have generous grace periods and even options on skipping payments if you had some unexpected bills come up. There usually is a small fee, but it beats being late. Be sure to know all the options you have and who to talk to if the need arises.
Do you report information to the credit bureaus?
For credit conscious consumers, it is important to know that your payment history will be reported to all three credit bureaus. It is common for some loan products to skip the whole credit reporting process. It would be a shame to make years of on time payments and not have anything to show for it. If it is not being reported, it never really happened.
Keep these seven things in mind when you go to close on your loan. Asking the right questions will save you some serious money!
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