Here’s how a single percentage point can change the cost of your loan


Understand the terms of your loan

No matter what you’re looking for, whether it’s a mortgage, an unsecured personal loan, or a new credit card, interest rates matter. Agreeing to pay just one percentage point more in interest is like allowing the bank to siphon extra money from your account each month.

One sure-fire way to avoid bad deals: understand the loan repayment terms. And keep an eye on the total cost, rather than the monthly payment.

To get the lowest possible interest rates, start by increasing your credit score. It can be the difference between getting a loan when you need it or hoping to find enough in your checking account to deal with an emergency. There are many ways to improve your score. At the end of the day, the best strategies are simply to pay your bills on time and minimize the amount of your debt.

One last example

As an illustration, let’s say you’ve dreamed of a kitchen remodel. You fall in love with a display installed at your local home improvement store. The seller mentions the price and you swallow your surprise. That’s thousands more than your bloody research predicted.

The seller insists that the number you came across online is the manufacturer’s suggested retail price. Apparently, the demand for this particular design is so high that people are willing to pay more. The seller makes some suggestions on how you can pay for the kitchen of your dreams, from paying out of pocket from your checking account, to buying a credit card in the store to pay the rest, to paying for it. unsecured personal loan application.

You turn wisely to leave, but the salesperson stops you and asks what your ideal monthly payment would be. They mention a banker who might be willing to help you get the perfect personal loan. The salesperson casually asks you about your credit score and you suddenly feel nervous. As much as you want a kitchen remodel, as much as you wish you had left the store as soon as you heard the price. Moreover, you are not sure if you take out a personal loan and increase the debt you already have.

But the price the seller is now listing on cabinets and counters is lower than anything you’ve seen online. You can already imagine having a Thanksgiving dinner in your new kitchen. At this point, you are emotionally engaged. The salesperson calls the loan officer, and even though you know you are making an emotional decision, you agree to let the bank do a credit check. He’s coming back a little better than expected. You are so relieved that you suddenly feel like everything is fine. You can take another monthly payment in exchange for your dream kitchen, right?

The lender emails a loan application that you must complete directly in the store. The APR shown to you on the loan is about 1% higher than expected, but don’t worry. After all, how much damage can 1% do? The lender also suggests that you extend the term of the personal loan to 72 months instead of the 60 months you requested to “keep the monthly payment low”.

Now you want this new kitchen so badly that you accept a loan term without doing the math. You sign on the dotted line without thinking about how much you will pay in total.

Don’t be that consumer. Never forget that you have the power to walk away from a bad deal.

We are all human. We will continue to self-diagnose based on the latest Google search results. We will still touch a plate the second a server tells us it’s hot. And we will always make financial mistakes. What makes us smart humans is correcting these mistakes so that next time we can get it right.


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