Getting a loan may seem like the easiest way to get a break from your financial troubles. However, before getting a loan from any lending institution, here are three crucial things to remember:
1. The Cumulative Cost of the Loan
The total cost of acquiring and refinancing a loan is called the “total cost of borrowing.” Many people borrow money without considering the total cost of borrowing. This decision can be very costly in the long run. Therefore, you should always consider how much you will pay in interest and other minor costs over time when deciding whether to borrow. You can calculate this using the interest rate, the loan term, and the principal amount borrowed.
The Total Cost of Borrowing
The total cost of borrowing takes into consideration both principal and interest payments. The principal is usually expressed as an amount borrowed minus a sales commission or closing fee. It includes principal and interest payments. The interest rate is described as an annual percentage rate (APR). So, for example, if you borrow $1000 at 12% APR over five years at a monthly payment of $100, then the total cost of borrowing would be $1250 ($1000 – $100 x 5).
Minor costs include things like taxes and insurance. You have to pay these costs whether you borrow or not. These negligible costs are included in your total cost of borrowing, but they are not the primary reason for a loan.
2. The Repayment Plan
There are several small business lending options available. Some loans have fixed monthly payments. For example, you could borrow $1000, use it to purchase office equipment, and pay back the loan with a fixed monthly cost of $100 for five years. You might also choose to pay back the loan in installments over a longer period. It is called a repayment plan and can be expressed as an annual percentage rate or an APR monthly. A repayment plan must be at least two years long, with one payment per month due by the end of each year.
3. The Loan Terms
Loan terms refer to the agreement or contract made between the two parties. This document sets out the terms of the loan, including how much you will borrow, how much you owe after making payments, how much you are required to pay back, and when. It is crucial for small businesses seeking a loan from banks to read and understand the printed details in the contract before you sign it.
You should ask yourself if it is a good deal for you. For example, are there penalties for early repayment? Is there a maximum limit on your debt? You must ask or seek legal counsel before signing if you have any questions. The best way to do it is by contacting a local bankruptcy attorney or an attorney at a local law firm. An attorney can explain the legalities of the loan and how they relate to your situation. Bankruptcy attorneys can also advise you on how and when to repay your loan.
According to Lantern by SoFi, getting a business loan for startups has become simpler as banks have started offering repayment flexibility and comfortable loan terms. To borrow money, find a suitable match that understands your needs and supports your goals.