You know that borrowing money comes at a cost, but what are all of the line items that make up the total? Your interest rate isn’t the only thing you’ll pay for. If you don’t understand your loan clearly, you could end up getting hit by extra charges and penalties.
So, here are some common hidden fees to look for when shopping around for loans:
- Insurance fees
- Late penalties
- Balloon payments
- Prepayment fees
- Transaction fees
- Credit card convenience fees
- Credit report fees
- Appraisal fees
- Cost of your interest rate structure
- Origination fee
APR: True Cost of a Loan
The best way to uncover any hidden costs is to go through everything that makes up your APR. The Annual Percentage Rate, also known as APR, is a rate that is charged annually to anyone that borrows money. Any loan, like an auto title loan, credit card or mortgage will have an APR, expressed as a percentage. This number includes any additional costs or fees that are included in each transaction over the span of a year. So, APR refers to the yearly cost of borrowing money over the entire term of the loan.
APR is used as a way to provide a total number that can be compared to determine which loan option is best for your situation. There are often hidden fees and changing rates that are written into the fine print of any loan so you have to be careful who you decide to work with. This is why you should always negotiate and compare details about a loan’s APR, not just the interest rates, when shopping around.
Annual percentage rates and interest can be confusing, that is why by law, your APR must be clearly explained by lenders and credit card companies before you sign any documents to borrow money. The best way to calculate your APR is to have your lender lay out the math for you. But, even though a lender will explain the numbers, they still might include hidden extras.
To help you catch these, look for these things in your APR.
If you miss a deadline, late payment penalties are something that you’ll face no matter what company you’re working with. And while you should never plan on making late payments, it happens to the best of us. When going through a loan package, make sure you check how much paying late will cost you, just in case.
No, not that kind of balloon. This is one of the worst loan tricks in the book that you could get hit with. A balloon payment is a large payment due at the end of a loan. A balloon loan typically features a relatively short term, and only a portion of the loan’s principal balance is amortized over the entire term. But at the end of the loan term, the remaining balance is due as a large final repayment. This is where it gets its name, because the final payment balloons in comparison to the other payments. Balloon payments tend to be at least double the amount of the loan’s other payments, but it can end up costing thousands of dollars.
You should always walk away from a lender that penalizes its customers for making early payments or for paying off their loan before the scheduled date. This is not only one of the most unfair hidden costs, but it’s also a red flag signifying that the lender does not care about your financial success.
A lender might not always hide “hidden” fees. This is usually the case with loan insurance charges. Sometimes these types of add-ons are necessary for your own protection with your loan, other times they’re not. Loan insurance is sold just in case something happens to a borrower that might make them unable to pay the loan in the future. If you really see major risk to your health or job in the future, you might want to consider this option and factor it into your budget. But, if you know your health and employment situations are stable enough, you might want to drop the add-on premium.
Transaction Fees / Convenience Fees
Ask about a lender’s payment methods and if paying with a card will have convenience fees attached. If you plan on paying with a card, make sure you factor this into what you’re allotting for monthly payments in your budget. Or, consider using an alternate payment method to avoid this additional cost entirely.
Credit Report Fees
Some lenders can charge you just for running a credit check on you during the loan application or processing stages.
This is more common with mortgages where a house has to be appraised, but make to watch out for if a car title loan lender is trying to charge you for inspecting and valuing your car.
Interest Rate Structure
This is the most complicated cost that goes into your loan because there are many different interest rate structures, some more expensive than others. There is a lot we could explain about interest rate structures, but here are the main things you need to know:
In a normal loan, interest will be added every day at the agreed rate. When paying off your balance, you only pay back the balance of the loan plus any interest to date that has grown since your last payment. But, with pre-computed interest, the total amount of interest that you would pay during the entire term of the loan is calculated and added automatically to the balance up front. This gives you no incentive to pay off your balance early because you’d still have to pay the same amount of interest no matter what. This kind of works like a sneakier prepayment penalty.
This is known as “interest on interest,” and is very common with loans. Exponential growth is created by compounding interest and is the main reason your monthly interest rate and APR are different. Basically, all you need to know is that looking at a loan’s APR is important to give you the best picture on how much your interest structure will cost.
A lot of lenders will charge some kind of origination fee. After all, there is a lot of work that goes into valuing your car, calculating your loan terms, underwriting the paperwork and the customer service along the way. Just make sure you know what the origination fee is and how you would be paying for it. Know if it’s going to be deducted from your loan amount, added to your monthly payments, etc.
Car Title Loans with LoanMart
At LoanMart, our auto title loans are fully amortized with no balloon payments or pre-payment penalties. Transparency is part of our mission; we don’t believe in hidden fees. We offer competitive APRs with excellent customer service to help you understand every part of it.
Call LoanMart today to speak to a friendly customer service representative that can give you a free estimate and explain more about how our auto title loans work and their cost.