Loans: What to Look For

Chances are, you'll have to take out some sort of loan during your lifetime. Maybe you already have. Here's some basic guidance on the three phases of dealing with loans: choosing one, repaying it, and (should you need to) refinancing it.

Shopping for a loan
When shopping for a loan, focus on the long-term cost of the loan, not the monthly payment. “Many car dealers or even mortgage lenders will entice borrowers by asking how much they can afford to pay each month,” said FDIC Senior Consumer Affairs Officer Janet Kincaid. “It may be better to pay slightly more money each month, but for a shorter time period, if it means you will be paying less in total interest.” She also said that some people look so much at the monthly payment that they don’t notice certain fees or service charges that are imposed. “You’ve got to look at the full picture before signing a loan agreement, including the APR and provisions of the loan that can increase fees,” Kincaid said.
(Taken from "51 Ways to Save Hundred on Loans and Credit Cards," FDIC Consumer News, Summer 2007.)

Do your research; shop around for the lowest interest rate, though your credit score may determine what interest rates you are offered. If you're looking for an auto loan, there are an abundance of online calculators you can use to compare rates.

As far as school loans, take what you can get (but only if you really need it) from Uncle Sam. Federal Stafford loans will almost always be the best deal. If you're offered subsidized loans, go for it; they won't accrue any interest until you graduate! They also won't accrue interest if you go into deferment after graduation. You can, of course, start paying them off early, but since they're not accruing any interest, you might be better off investing any extra money you save while you're in school (or using it to pay off other interest-bearing debts). Unsubsidized loans start accruing interest as soon as you get them. Still, they generally offer much better rates than private loans and you don't have to start repaying them until six months after you've finished all your schooling—though the sooner you can start paying on these the better since they're accruing compound interest.

With certain types of loans you can avoid unnecessary interest charges if you pay for certain costs out of your own pocket instead of borrowing that money, too. Let’s say you’re getting a new mortgage and you’re offered the chance to add the closing costs to the loan instead of paying them upfront. Sounds good on the surface, but remember that you’re not getting out of paying the closing costs—they’re added to the loan balance, so your monthly payments will increase and you’ll be paying interest on the closing costs.


Repayment
If you can afford to pay off your loans early, do it. You can save interest expense by increasing your monthly payments and/oror choosing a shorter payment term on your loan.

With auto loans, beware the trap of getting “upside down”—owing more on the car than it is worth when you sell or trade it in.

Talk to your banker if you’re having problems repaying a loan. Explain the situation and any unusual circumstances. Many lenders will agree to temporary or permanent reductions in your loan interest rate, monthly payment or other charges. Open communication is key. Again, it helps if you’ve had a clean record in the past.
(Taken from "51 Ways to Save Hundred on Loans and Credit Cards," FDIC Consumer News, Summer 2007.)

Refinancing
Refinancing is paying a loan off “early” with a new, better loan, and it can save you money. But you have to know when refinancing a mortgage makes sense. According to the Consumer Action Handbook published by the Federal Citizen Information Center, “Consider refinancing your mortgage if you can get a rate that is at least one percentage point lower than your existing mortgage rate and if you plan to keep the new mortgage for several years.” Also consider any extra fees in acquiring the new mortgage.

Consider refinancing an auto loan if you expect to make payments for several more years. It may be harder to find a better interest rate because your car has probably depreciated in value. But if the savings from a lower interest rate more than offsets any closing costs, refinancing can make sense. If you have multiple student loans, look into the potential benefits of consolidating them into one new loan at a lower interest rate. Compare the rates, terms and costs. “It may not be worth consolidating if it means losing a good fixed-interest rate, giving up a long grace period before loan payments are due, or running up other costs that would exceed those on your existing loans,” said Sam Frumkin, a Senior Policy Analyst in the FDIC’s Division of Supervision and Consumer Protection.
(Taken from "51 Ways to Save Hundred on Loans and Credit Cards," FDIC Consumer News, Summer 2007.)

Beware Scams
Steer clear of fraudulent or deceptive offers targeting borrowers. Unscrupulous individuals try to lure consumers into questionable, high-cost deals or fraudulent transactions, usually involving new loans or credit cards or offers to help deal with debt problems. Here are some examples:

“Predatory” loans: People from nonbank or home improvement industries may use false or misleading sales tactics to make high-cost loans to consumers in need of cash. Victims who can’t afford the loan may be pressured to refinance. Borrowers who pledge their house as collateral could lose it in a foreclosure. "Payday loans" make up the majority of predatory loans. There is a load of (false) information about predatory loans and the system that supports them at the ironic Predatory Lending Association website.

Credit repair scams: Con artists may promise to erase a bad credit history or make easy loans to people with spotty credit histories. Most charge exorbitant fees or never provide the promised money. Only steady and consistent on-time payments by a consumer can legally repair a credit record.

Mortgage foreclosure frauds: Thieves may contact homeowners at risk of losing their home to foreclosure and propose to help by “paying your mortgage” while you temporarily “rent” your home from them. They then trick you into signing documents that transfer the ownership of the property to the crooks. In other scams, phony companies claiming to be housing counselors offer to negotiate a new loan or perform other services for very high upfront fees and do little or nothing in return.

(Taken from "51 Ways to Save Hundred on Loans and Credit Cards," FDIC Consumer News, Summer 2007.)


Federal Trade Commission's article with more info on recognizing deceptive offers for private student loans