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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 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 at 12:17

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