Whether you are looking at taking out a new loan or a loan to refinance another loan, figuring out which loan terms would be best depends on a lot of different things. The first thing you need to consider is why are you getting the loan, what is the goal?
If it’s a new loan how long do you want the loan term to be? If you’re refinancing, are you looking to save on your monthly payment? Or are you looking to save on your interest and have the loan cost you less overall?
Because there’s a lot of different terms and factors that play into loans and figuring out which one is best takes a little time. Let’s review some of the reasons you may or may not pick a certain loan.
Evaluating Loan Terms
Some loan terms you want to consider include, the length of the loan, the interest rate, if the interest rate is fixed or variable, what would be the monthly payment, and what is the reputation of the lender.
Loan Term = The Amount of Time You Have to Repay the Loan
For example, mortgage loans are often for 15 or 30 years.
A car loan could be anywhere from 3-6 years.
Standard repayment for student loans in 10 years, but could be as long as 25.
Interest Rate = How Much You Pay the Bank for Allowing You to Borrow the Money
If you take out a 10 year, $15,000 loan at a 5% interest rate, in addition to the $15,000 you borrowed you would also pay $4,092 in interest to the bank as a thank you for being lent the money.
Fixed vs Variable Interest Rates
Knowing the rate is step one, then knowing if that rate may change is step two.
Interest rates fall into one of two camps, fixed or variable. Fixed means that the interest rate will remain the same throughout the life of the loan. Variable interest rates can change and how often can depend on what it states in the terms of the loan. The loan terms may also state the minimum interest rates as well as what the maximum of the interest rate could be.
Why I Refinanced My Bar Loan
For example, my bar loan, before I refinanced had a variable interest rate and it changed (increasing each time) three times in just six months. It’s what pushed me to decide to refinance my bar loan and in September 2016 I refinanced with SoFi for a fixed interest rate loan.
Generally, variable interest rates start out significantly lower than fixed rate interest loans. So if you believe you’ll be able to pay off the loan quickly it could be in your best interest to do a variable interest rate that’s significantly lower than a fixed rate.
However, if you’re going to need the entire life of the loan to pay it off, a fixed interest rate ensures you know how much it’s going to cost you at the time you sign on the dotted line.
Calculating Savings When You Refinance
When looking to calculate savings. there’s two different ways to do it, saving over the life of the loan, and saving on your monthly payment.
Now, it’s possible, that if you get a good enough of a refinance that you will save both on the monthly payment as well as the overall money paid, but it could just be one or the other as well.
Are You Looking to Save on Your Monthly Payment or How Much You Have to Repay?
For example, if you have a loan at 8% that you refinance for 6.5% loan for the same monthly payment of your previous loan, you’ll end up saving money in the long run and having the loan paid off a bit sooner.
If on the other hand, you refinance to a lower rate and extend out the terms of the loan your monthly payment will likely drop but you may end up paying more in interest overall because you are paying for a longer period of time.
Though it’s only possible to know exactly how much you’ll save when looking at a loan with a fixed interest rate. With a variable interest rate you could potentially save a ton of money but if the interest rate goes up, you may not and there isn’t any way to know exactly how much you’d save.
Recommended Refinancing Company
If you have private loans or your debt to income ratio allows, consider refinancing with a company like SoFi. Learn more about what it’s like to refinance with Sofi. Refinancing my bar loan with SoFi ended up saving me over $1,000. Use my link to refinance your student loan and you’ll get a $100 bonus.
Knowing the Reputation of the Lender
Every lender is going to have a complaint so take reviews you find with a grain of salt, but before taking out a loan, do a little research.
Is the lender easy to work with? If you hit a snag and have trouble with making a payment one month, would they be willing to work with you?
Do some research and ask around before choosing one particular lender to work with on your loan.
Wrapping it Up with a Bow on Top
Overall there’s no one right answer when it comes to figuring out which loan is going to work best. It depends on your situation and your goals. Just make sure you know how long your loan is for, the interest-rate, whether it’s a fixed or varied interest-rate, and what your monthly payment will look like over the life of the loan. Lastly, you’ll want to know the reputation of your lender and how much you’ll end up paying back in total, including the interest.