The two key elements of consumer loans

If you’re considering taking out a consumer loan, like a personal loan or an auto loan, you must think of two things: Rate and term. These two factors determine not only your monthly payment, but also the overall cost of your loan.

Many people get tempted by low rates or low monthly payments, without realising that they may be ending up paying more than 25 per cent more in interest. And the additional costs are often justified for the convenience of getting a major purchase in hand sooner. The debt is not without consequences, however, and that is why you should not rush into taking a loan without full considerations of its price.

With that in mind, make sure you consider the following before you get a new loan.

Terms and conditions

Ask to see how the loan term impacts your rate and payment. You may find that if you take your loan for example on 48 months instead of 60 months, the increase in the monthly payment is insignificant and you will save a lot on the total cost of the loan.

You can also ask about at what point the rate changes. For example, if you can afford the lower rate at the longest term can afford, you may be getting the best deal on your loan. The bottom line: don’t look at the monthly payment in isolation.

Future obligations

If your solving a current problem by taking a personal loan that stretches over six years, what will you do next? You probably will have to manage your expenses along with these payments. Keep in mind your future obligations. Stretching personal debt over years isn’t ideal.

Think of the shortest period you can afford to pay off your loan, and make it a priority to try to pay it off sooner if possible, and if you don’t get hit by penalties.

In addition, consider your future purchases. For example, will you be considering buying a home? Maybe taking a person loan now is not the best idea, unless you’re consolidating debt. Loans have a long-term impact on your credit picture for a long time, so don’t rush to take one unless you have to.

Alternatives

Having a low rate available can be tempting to finance as much as you can of the cost of a major purchase. But when you calculate the overall cost of the loan, you may consider alternatives, like putting a sizeable down payment or buying something that is less expensive.

Other alternatives can be leasing instead of buying, especially when it comes to cars. If you’re not sure that your finances will be stable over the term of the loan, leasing can be a wiser choice. Another option is looking at the retailer’s or provider’s financing. Some retailers offer zero-interest financing that can be a much cheaper option than taking a personal loan.

Terms and conditions

Finally if you decide to go ahead with taking out a loan, be fully aware of its consequences. Will you be able to pay it off, if you need to? How much is the penalty for early repayment? Consider a situation where you will need to leave the country or lose your job, will you be able to keep your payments until the end of the term and pay them remotely.

Read the contract terms closely to understand the fees associated with late payments, in particular. If you’re buying a car or another asset understand what the lender allows you to use the car for and any limitations. Some lenders, for example, may not allow you take the car outside the country until the loan is paid off.

Finally, if you are required to sign a blank check, be very clear on what number will go on this check, and how it is calculated in case of default. By doing so, you will be sure that you’re taking a risk that you can afford down the road.

The writer, a former Gulf News Business Features Editor, is a Seattle-based editor.

Think before you owe