This blog post is the second in a three-part series. Read Part 1: How Loans Work and Part 3: Loan Terms Matter.
When there is an important purchase that you need to make and you simply don’t have the money to pay for it up front, a loan can be a great option. But how do you know you’re getting the best deal possible? And what questions should you ask to determine if a loan is truly affordable for you?
Last week in our How Loans Work article we outlined what a loan is, when a loan might be a good idea, and some of the benefits that come with borrowing money. Now, let’s take a look at the fine print. Here are six questions you should ask when shopping for a loan so that you can make an informed decision:
- Loan amount: How much money can you apply to borrow through this lender, and is it enough to cover what you need? Keep in mind, a loan doesn’t have to cover the total amount of the purchase – if you have money saved for this purchase, or if you have alternative funding sources, you can take out a partial loan to pay the balance.
- Fees: Are there any upfront fees (like application or origination fees), ongoing fees (like monthly or annual fees), or other fees (like prepayment fees or check processing fees)?
- Interest rate: What is the interest rate and is it fixed or variable (see below for definitions)?
- Loan terms: What are your options for the total length of time you have to repay the loan? Generally, a longer loan term has lower regular repayment amounts, and higher total amount paid toward interest in the end.
- Repayment amount: How much will you be obligated to pay each period as part of your repayment plan? You can use a loan calculator (you’ll find one on our homepage) to determine what your monthly payments will be by entering in your total loan amount, loan terms (how many months), and fixed interest rate.
- Repayment terms: What are your options for a repayment schedule (usually payments are made monthly, but occasionally you’ll have other options like weekly), and can you make extra repayments or repay the loan early without a fee?
More Helpful Definitions
Here are some other helpful terms to know when researching your options for a loan (borrowed in part from Capital One):
- Fixed-rate loans: These loans keep the same interest rate throughout the life of the loan.
All PATF loans are fixed-rate loans – Mini-Loans have a fixed interest rate of 0% and Low-Interest Loans have a fixed interest rate of 3.75%.
- Variable-rate loans: These loans have an interest rate that increases and decreases based on the changes of an underlying interest rate index (usually the Prime Rate).
- Secured loans: These loans are backed up by a large asset (like your house or car) as collateral (something valuable owned by the borrower and pledged to the lender which would be forfeited if the loan is not repaid). Most lenders offer secured loans as a way of protecting themselves when the loan amount is very high, or when the borrower’s credit score is low enough to be considered “risky”.
Less than half of PATF loans are secured – only home modification loans that exceed $10,000 and all adapted vehicle loans require collateral.
- Unsecured loans: These loans do not require any collateral, often have higher interest rates, and may be difficult to obtain if you have a low credit score.
PATF stands apart with fixed low interest rates for all of our loans (0% for loans under $2,000 and 3.75% for loans over $2,000, whether secured or unsecured), even though some of our borrowers have little or no credit when they apply for a PATF loan.
- Traditional (non-guaranteed) loans: A loan that does not have a third party promise to pay the loan if the borrower defaults (fails to pay the loan according to the agreed upon loan terms). This type of loan is usually only available to borrowers with very high credit scores and low debt-to-income ratios.
PATF believes in the importance of access to assistive technology for everyone, so we can offer to extend loans to borrowers with lower credit scores and higher debt-to-income ratios.
- Guaranteed loans: A loan guarantee is a promise by a third party to take responsibility for paying off the loan if the borrower defaults.
Occasionally, PATF partner banks will deny a PATF application when it does not meet their qualifications. The PATF Board of Directors will consider guaranteeing a loan for amounts over $2,000 and up to $35,000 in these cases so that the borrower can still acquire the assistive technology they need. PATF’s criteria for approving access to a guarantee is more flexible than most traditional lenders, and the Board believes if the applicant has the ability and the willingness to repay, that they should be able to borrow.
Are You Eligible for a Loan?
Most lenders follow lending guidelines, or a list of qualifications you need to meet in order to take out a loan (you can find ours on our Financial Loans page). These qualifications also affect the type of loan available, the interest rate, and the loan terms. Creditors primarily look at your credit score and debt-to-income ratio (the percentage of your monthly income that goes toward paying off debts). They may also take into account such information as your employment status and length of time in your residency, among other things. While you may be able to get a loan with a low credit score and a high debt-to-income ratio, your interest rate will likely be higher (costing you more money in the long term), you may need collateral (putting you at risk to lose your asset if you default on the loan), and you may need a guarantor (which is not always an option). (Learn more about credit, how to build it, and how to manage your debt.)
A few of the factors PATF takes into consideration when reviewing a loan application are whether or not the loan is for the purchase of assistive technology, the borrower’s credit history and score, debt-to-income ratio, and capacity to repay the loan. PATF looks at the borrower as a whole person, taking into account their individual circumstances and ability to pay back a loan, rather than just looking at the numbers.
So, you’ve asked the important questions and gathered the necessary information – you’re ready to choose a loan! But it’s not as simple as comparing interest rates and monthly repayment amounts. Next week we’ll take a look at an example of how a $33,000 loan for an adapted vehicle can cost as much as $52,000 or as little as $37,000 in total, depending on the loan terms, as we discuss why loan terms matter!
You can learn more about PATF’s loan programs on our Financial Loans page.