Money Lending Terms You Should Know

 

If you’ve applied for any type of lending before, you might have looked at the fine print on your contract and thought it was written in a different language. However, understanding this terms and conditions are extremely important. You should know and understand the following terms before agreeing to any financing:

Origination fee: Some lenders will charge an origination fee, or application fee, to defer some of the costs that go into evaluating your lending requests. This fee could either be expressed as a dollar amount or as a percentage of the loan you’ll receive. Some lenders might negotiate the fee with you, and you most likely won’t have to pay it until your deal is approved.
This type of fee varies among lenders. Some lenders don’t even charge the fee. Others charge upwards of 4%. However, don’t assume that the lender charging the lowest origination fee will be giving you the best deal overall. You should always ask your lenders for a clear break-down on the percentage rate of your loan and if that rate factors in all applicable fees.

Fixed rate: A fixed interest rate means that the rate you pay on a loan doesn’t fluctuate during your repayment period. When interest rates are low, it’s typically better to take out a fixed-rate loan rather than one with a variable rate.
Variable rate: This is a different type of interest rate and is the opposite of fixed interest rate. The interest your lender is charging you can rise and fall when the market fluctuates.

Default interest rate: This type of interest rate is much higher, and can be charged if you don’t make timely payments to your lender. While this is more commonly found with lines of credit, some lenders do use this tactic to make sure they’re being paid on time.

Contract duration: You should be aware whether or not your choice of financing comes with a contract duration. This is most common with invoice factoring, however you might find that other types of financing do as well on different terms. This technique that lenders use requires you to factor your invoices with them for a specific amount of time, generally 6 to 12 months. If you break this contract, you will likely be charged a hefty termination fee.

Prepayment penalty: Check to see if your loan’s terms mention a prepayment penalty. This penalty is charged when you pay off the balance before the loan period is over. While doing this can save you money by not having to pay additional interest, if your lender charges this fee it could end up costing you more. You definitely don’t want any financing with a prepayment penalty if you want to keep the option open to refinance it later with a lower cost loan.

 

All of these terms and conditions might seem like a jumbled mess at first glance, but it’s important to read over them thoroughly and to be able to understand what you’re reading. Once you’ve gotten a basic understanding of what these words mean for you, you can then assess your different lending options and choose what works best for you. If you’re interested in exploring your lending options further, contact us today and see what fits your needs!