Factors to Consider When Comparing Loans

When one thinks about taking a loan from a bank or any other financial institution, the most prevalent factor that arises in their mind is the associated costs. Currently, every borrower is allowed to repay their loan in installments called EMIs. However, the cost factor is not limited to the payment of the monthly principal. You need to consider the monthly payable fees, the rate of interest, and much more. The ability to put all these factors into perspective is important for all borrowers.

Given below are some factors to consider while comparing loans.

The loan amount
This is one of the preliminary aspects that you need to consider whenever you think of borrowing money. One of the most important determinants of the ability to repay the loan is your earning. The level of earning is taken into account before deciding the amount for which you could be eligible. It is also determined by other factors like your job status and the organization you are working with. Your eligibility for getting a loan is also determined on the basis of whether you are running your own business or working for others. All these factors are carefully judged to check your repayment capacity.

Interest rate
You must make a serious assessment of the interest rate charged for the loan type you are going to borrow. Various rates of interest are charged for different types of loans. For example, personal loans charge comparatively higher ROI than the other types of loans. Also, the government may relax the interest rates for people having a below-the-benchmark income level and thus the interest rates charged by HBL are comparatively reasonable. Rates offered by banks are comparatively lower than those charged by other financial institutions.

Loan term
The time within which you will have to repay the loan is an important factor. The ROI also differs for different terms. Loans are normally extended for an average repayment period of 15 to 30 years. When the loan has a “balloon” mode of repayment, the term is normally shorter. In these cases, the loan gets amortized. Any loan with a 5-year term amortized over 30 years will have equal EMIs for 5 years as a 30-year normal loan. After the 5th year, there will be a payment of huge amounts for the remaining balance.

Fees for origination
This fee is treated as the payment made for the creation of a loan. It is added to the loan amount when the calculation of the Annual Percentage Rate is done. This is charged as an upfront fee and is to be paid in parts. The existence of 1% origination fee is common for all loans, though the rates may differ depending on their nature.
Besides, the borrower may also require to pay the bank or financial institution a fee for their services. This fee is also included in the APR and is regarded as an upfront fee.

APR
Annual Percentage Rate or APR helps the borrower while comparing the various loan options available to them. There may be cases where a loan with an apparently stated lower rate of interest is of no worth as the relevant charges are higher. On the contrary, a loan with a declared higher rate may prove to be an excellent choice due to the lower amount of fees. APR incorporates all the related fees into a single rate, making the task of loan comparison easy for the borrower.

The borrower needs to consider various expenses that the lender might charge as incidental costs. These costs normally include the origination fee of the loan, the discount points, the fees for appraisal, etc. A number of organizations charge for their commitment to offering a loan. So, carefully analyze the options and settle for the one that meets your needs best.