If you're taking out a loan or a high line of credit, it can be pretty daunting to sift through all the fine print associated with it.
"You need to know all of the terms and conditions associated with the loan," says Tom Quinn, consumer credit expert for Credit.com.
Because this can be no small task, MainStreet asked credit experts what essential questions borrowers should ask before taking on a large loan.
1. What are the terms of repayment, and can I pay my loan early?
Often creditors will offer a loan with several different payment plans that feature different lengths of repayment under a variety of interest rates.
For instance, your creditor may advertise a 12-month payment plan that carries a 0% to 5% APR (and monthly payments that will be higher) or a 60-month payment plan that carries, say, a 14% annual percentage rate (offering lower monthly payments but higher interest payments). (Do you have too much debt? Check MSN Money's debt calculator.)
While the shorter term is undeniably attractive for the interest savings it offers, some borrowers may prefer the longer payment plan because of its lower monthly payments.
No matter which plan seems right, Bruce McClary of ClearPoint Credit Counseling Solutions says borrowers should ask if they will incur a penalty should they pay off the loan ahead of schedule.
"The penalties are typically charged by predatory lenders, because they want you to be locked in to paying the high interest rate on the loan," says Ken Lin, the CEO of Credit Karma.
Such penalties, if charged, will vary, but they typically are based on a percentage of the remaining loan balance or the equivalent of a few months of interest payments.
"With most lenders, you'll be able to pay the loan off early," McClary says, but he reiterates that borrowers should ask before agreeing to a longer payment plan.
2. How will my interest be calculated?
McClary explains that typically, creditors present interest rates as annual percentage rates, which means the total interest is incurred over the course of one year. To put it more simply, if your loan or credit line carried a 12% APR, you would have 1% of interest applied to your balance each month.
"That's the simplest way, but there are other methods some lenders use to calculate interest over the course of the loan," McClary says. For instance, certain lenders may divide the interest rate by 365 and apply that rate to your loan balance every day, adding more to the principal on which they charge the interest you owe on your monthly statements.
