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When one wants to take on a loan, they can do so from multiple banks. There are also comparison websites that allow you to see various loan offers from each bank. Most of them use the annual percentage rate (APR) and the value of the down payment (10%, 15%, etc) as their main comparison criteria, but what about other characteristics of the loan offers?

What should one look for when selecting a loan offer from one bank or another? Should you just go for the bank that has the smallest APR? Go for the one that requires a minimum down payment? What are some good criteria to look at when selecting one loan or another?

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Depending on the type of loan there may be features that are not as common as for, say, a mortgage. Some things that come to mind:

  • Fixed vs Variable rate
  • Length (term) of loan
  • Closing costs (although this is incorporated in the APR)
  • "Deferred" interest that becomes due of you miss a payment (more common on "0%" loans)
  • "Prepaid interest" (more common on car loans)
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A non-money related thing to consider is what happens after settlement day. Some lenders sell your loan servicing, which means that a few weeks to a few months later you will be sending your money to a different address who will have a different customer service staff. I am amazed whenever I hear that this switch happens without a problem, because in my experience the switch has never gone smoothly.

I believe in the United States they have to disclose what percentage of loans they sell after settlement.

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Fees, especially

  • "Finance fees": monthly or yearly fees you must pay. Sometimes based on the balance of the loan. I've mostly seen this on vehicle financing from dealerships. If they say your loan is 2% interest, but that you have to pay a monthly/weekly/yearly/recurring "finance fee" of $5 per every $100 finances, you're really paying 7% interest
  • Prepayment penalties: You can save a lot of money in interest payments by reducing your balance faster than planned and by paying the loan off early. However, some lenders will charge you a fee to do so. This may apply if you pay off the whole loan early, if you pay it off before a certain date, if you pay more than a particular amount of extra principal with any single payment, or any time you make any additional payment. It's possible you may still come out ahead even with such a fee, but you'll have to work out the math on that.
  • Closing costs/origination fees (vs. interest rate): Two different lenders (or two different loans from the same lender) may offer different interest rates, but the lower rate may cost you more up front (e.g. "points" on a mortgage). Evaluate how long it would take the difference in the interest rate to make up for the costs (e.g. did you get 2.9% instead of 3% by paying an extra $4000?). If it takes a very long time, it might not be worth it. If you'll never make up the difference before you pay off the loan, it's not worth it.

Non-loan expenses:

  • Insurance. If the loan is for a home or vehicle, the lender may require you to insure the collateral with a more expensive policy than you would like. The house or car is their collateral to ensure they are able to collect your debt in the event you don't pay. They have an interest in protecting their investment in the case where that vehicle or home is damaged or destroyed.
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  • Aren't finance fees and closing fees incorporated in the APR?
    – Kijit
    Jun 18, 2020 at 9:32
  • The finance fees could be (although I think I've only seen it listed as a separate charge, so the lender could advertise a lower rate). Closing costs are not; they are paid once up-front and are not recurring expenses throughout the life of the loan.
    – yoozer8
    Jun 18, 2020 at 12:17
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It's important to choose a lender who can support you with the right guidance, and terms throughout the life of your loan.

The following 5 things should be always at the top of your mind when you're trying to find a lender you can trust to work with you for the foreseeable future.

  1. Experience/Credibility: You need someone who isn't going to dupe you into paying more than you owe with fees you didn't expect and extra costs hidden beneath your repayments. A credible is someone you can trust to give you the full facts about your borrowing experience from the moment you start working with them. Experience is generally established by the amount of time your lender has been in business.

  2. Interest Rates: APR is one of the first things you thought about when you started looking for a lender. It's important to remember that interest rates will determine how much you officially end up paying for your loan. When you're evaluating interest rates, keep in mind that you're just looking at the average rate most of the time, rather than the rate you'll be given. Keep in mind that interest rates aren't the only expense you'll need to think about when you're taking out a loan.

  3. Payment Flexibility: You must be aware of how flexible a lender is willing to be with your payment schedule. Remember to think about things like "exit fees" when you take out a long term loan. If you suddenly find that you have enough money to pay off your loan all at once, then you'll want to ensure that you can do that without incurring penalties.

  4. Response Time: Make sure that you can reach out to your lender whenever you need to find something about your loan. Support is important in a financial relationship. You need to check with your provider to find out how long you will need to wait before you start seeing a change

  5. Documentation: It's important to have clear and legal documentation around your loan that informs you not only of what you're responsible for in terms of repayments, but what the lender promises to do for you.

in your finances.

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