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Whether you’re taking out a personal loan, buying a new car, or signing a mortgage with a new lender, no two loans are identical. No matter what your credit score is or how long you’ve spent building a credit history, rates and terms vary by lender. Due to federal law, lenders are now more transparent than they used to be, but there are still a few things lenders like to keep under their collective hats. Here are three of them.
1. If you’d shopped around, you probably could have gotten a better loan
No bank or lending institution is going to tell you what a mistake you’ve made by working with them. If they were being honest, though, someone would say, “You know what? If you’d taken the time to rate shop and check out other lenders, you could have snagged a lower interest rate.”
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They’re also unlikely to admit, “We know that our low interest rate catches people’s attention, but the truth is, by the time you add up all the fees we charge for a loan, the actual cost of borrowing money from us is ridiculous.”
Tip: Always shop lenders. Even if the interest rate you find is only 1% lower than others, you can save thousands over the life of a loan.
2. We’re about to charge you some junk fees
When you consider how much a loan is going to cost by the time it’s paid in full, what goes into your calculation? For most of us, it’s principal and interest. For many borrowers, though, unnecessary fees cost them far more than they anticipated.
For example, some personal loan lenders charge an origination fee. Typically, these fees range from 3% to 8%. Let’s say a lender approves your loan application for $20,000 but charges a 5% origination fee. That means it takes $1,000 off the top (5%) and deposits $19,000 into your bank account. However, instead of having to repay $19,000, you have to repay the entire $20,000, even though you never saw $1,000 of it.
Lenders will provide you with a disclosure form outlining all fees, but some do their best not to overemphasize just how much those fees will cost you. Here are some of the other sneaky fees lenders count on to make a profit:
- Application fee: The amount you pay some lenders just to apply for a loan.
- Prepayment penalty: A fee some lenders charge borrowers for paying a loan off before it matures.
- Credit insurance: Credit insurance kicks in to pay a personal loan if specific things go wrong and you’re unable to make the payment. There are two important things to mention here: The first is that a healthy emergency savings fund can remove the need for credit insurance. Second, you must sign a form adding credit insurance to your loan. The lender cannot do that without your express permission.
Tip: The interest rate you’re offered is far less important than the annual percentage rate (APR). APR represents how much a loan is really going to cost you. Specifically ask a lender how much the APR on the loan is, and then ask to see every fee in writing.
3. If you cleared ‘this one thing’ up on your credit report, your credit score would increase, and you’d have access to lower-interest loans
Borrowers with the highest credit scores not only have their pick of the litter when it comes to lenders, but they tend to land loans with no origination fees, prepayment penalties, or other junk fees. And that’s where things get tricky.
Let’s say you have an average credit score, somewhere around 700. It’s not high enough to give you access to the best loans, but it’s not terrible, either. What a lender does not want to tell you is that there are steps you can take to boost your credit score.
One such step is to order a free copy of your credit report from all three major credit reporting bureaus. You are eligible for a free copy once a year and can order them through a site like annualcreditreport.com. Once you have the reports in hand, go over them with a fine-tooth comb looking for any potential errors. For example, a report that lists a loan as “active” when it’s actually paid off is a mistake.
Dispute all errors with the credit reporting agency in question. By law, credit report agencies have 45 days to either prove that the report is correct or remove the negative remark from your report.
Depending on what the mistake was, removing a single error can raise your credit score enough to push it into a higher range. The higher range your credit score falls under, the more lenders want to work with you, and the better your loan terms will be.
Tip: If you’re not offered the APR or loan terms you want, pull back long enough to focus on improving your credit score if possible.
Lenders may not be quick to tell you how you can save money, but now that you know, the ball is in your court.
The Ascent’s best personal loans for 2022
Our team of independent experts pored over the fine print to find the select personal loans that offer competitive rates and low fees. Get started by reviewing The Ascent’s best personal loans for 2022.
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