At one time or another, we all need a quick influx of cash. It could be for a medical emergency. Or, to pay for college. Maybe it’s to buy a new vehicle or that boat you’ve always wanted but just didn’t want to wait 10 years to earn the money to pay cash. Or, maybe it’s to purchase your first home or rental property. Regardless of the reason for seeking a loan, you should consider putting in at least the same effort you did into shopping for that boat into shopping for a loan to increase your odds of getting a “good” loan. At the end of this discussion, I’ll show you an example of a Bad loan and a Truly Ugly loan. I hope you don’t have one of these.
Searching For A Good Loan
When shopping for a loan of any type there are several things that you should consider, among them includes the rate of interest. Is it a teaser rate? Is it a fixed rate or can it adjust? If it adjusts, what index is it tied to and what is the historical average of that index? How often does it adjust and what is the margin? Is it simple interest or compounding? If it compounds, does it do it daily like a credit card? What are the fees? Are there origination costs? How about monthly or annual fees? What happens if a payment is late? Are there any prepayment penalties? Is there a balloon payment?
Having a variable rate of interest isn’t necessarily a marking of a bad loan, so I wouldn’t get too hung up on that. However, knowing the historical average of the index and the margin will help you determine if this loan is for you. Watch out for excessive fees and penalties.
Getting A Bad Loan
There are lenders that prey on people with bad credit. This can be a thrift or a pay-day lender that makes arrangements to collect a portion of the payment with each of your paychecks. These companies will generally have very high rates of interest and many will have pre-payment penalties.
These companies should be avoided if at all possible. Instead of getting one of these types of loans, check into ways to improve your credit, short-term and long-term, then borrow from a reasonable lender.
An Ugly Loan
In my opinion, a truly ugly loan is the PACE or HERO loan. This is a program that rolled out during the Obama administration for the purpose of “upgrading” your home with energy-efficient appliances & solar. Unlike other loans, this program was offered by the very companies that sold those appliances. The true terms of the loan were unclear at best and deceptive at worst. The loans were set up to be paid along with the homeowners’ real estate taxes, so they were paid once or twice per year. The problem with this is that the interest compounded, and many homeowners were shocked to learn that their interest paid was often in excess of 45%.
As you can see in the payoff statement below, this homeowner took out a loan of $34,167. After making payments of $21,505, they still owe $28,195. That means that only $5,972 went toward the principal and $15,533 went towards interest.
In Conclusion
With so many variables, how do you choose between a good loan, a bad loan and a truly ugly loan? You ask the right questions! When shopping for a loan, most people will ask 2 questions: What is the rate and is it fixed? But, as I just demonstrated, there is a lot more to selecting the right loan for you. So, just like shopping for that new car, boat or home, prepare yourself with the right questions to ask and if the lender you’re speaking with doesn’t like it, look for a different lender. I’ve been in the lending profession for almost 4 decades and I LOVE it when a consumer asks me questions because it helps me zero in on the perfect program for their specific needs.
Example of the HERO/PACE Loan
