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Working Out The Total Cost Of A Loan
When you are looking for a loan, you need to compare loans by working out the total cost of repaying the loan. Although many web sites allow you to compare the APR costs, working out the real total cost of a loan is a little more complicated. However, it is important that you do this so that you can budget accurately and also so that you can find the best deal for your needs.
Estimating the total cost
The quickest and easiest way to estimate the total cost is to multiply the total amount borrowed by the APR, and then multiply this by the number of years. For example, if you borrow £10,000 and the APR is 10% for 5 years, then 10000 times 0.10 times 5 equals £5000. This is the interest you will pay, so add this to the total amount borrowed and then you know to borrow £10,000 for 5 years at 10% costs you £15,000 in total. Of course, this is only an estimate and will be higher than the actual amount as interest payments are reduced as you pay off the amount.
Other costs
There are obviously other costs to add to this total amount, such as loan processing fees, payment protection insurance and any other fees you need to buy to set up the loan. Add these to the total cost mentioned before and you have the total that you need to pay back over the loan term.
TAR
If you are discussing the total cost of the loan with your lender, then ask them to give you the TAR. This stands for Total Amount Repayable, and will let you know the total you have to pay back during the loan term. The difference between the amount borrowed and the TAR will tell you how much the loan is costing. A smaller difference between these two numbers means a better deal for you.
APR
As well as knowing the TAR, you should work out how much you need to repay each month. To do this, divide the TAR by the total loan term in months. For example, if you were paying back £14,400 over 12 years, then you will pay back about £100 a month (14,400 divided by 144 months). Of course, this is also an estimate as the TAR amount you have calculated is an estimate. To get the exact amount, ask the lender.
Adding penalty costs
When working out the total cost of a loan, you should budget into the equation some penalty fees. Although you might never pay any of these fees, to allow for a few late payments will help you to be prepared in case. It may also help you to decide between two similar loans, depending on the amount they charge for penalties and late fees.
If you are unsure, seek advice
If you are looking for a loan and are still unsure how much you will need to pay back over the whole term, then consult an independent financial advisor, who can help you work out how much you are paying for each loan, and which is the best deal.
Advice for First Time Home Buyers Seeking Loans
First time home buyers are faced with a lot of confusion when seeking loans. Their inexperience could lead to them taking several wrong decisions which could become disastrous in the long run. Thus it is necessary to be well-informed on how the home mortgage market operates before entering into it.
Things to consider at the onset are the interest rates. That must be one of the prime deciding factors of the person seeking a home mortgage loan for the first time. After all, it is the rate of interest that will decide the amount of payment to make every month for a long period of time. The homebuyer must take time out and compare the rates of interest of different lenders.
However a low rate of interest is not just the only thing to be considered. Every mortgage has several other fees to be paid, such as appraisal costs, application fees, lawyers fees, closing costs, etc. All these must be found out in advance so that they do not hit hard later.
One more thing to consider is how much mortgage can really be afforded. This would determine how much payment the homebuyer would be making per month. The payments should not go beyond the budget of the borrower. When all these decisions are made, only then should a meeting be scheduled with the lender. The lender would make a careful study of the borrowers credit history and then only decide how much mortgage they would give, and at what terms. This is where the borrower must decide whether the payments could be afforded or not.
Rents must not be taken as a parameter to decide how much loan payments can be afforded per month. Rents are for a short term, while mortgages tend to go on for as much as thirty years. Hence, the borrower must think on a broader perspective. Also, the person will have to pay taxes such as property taxes, which were not involved when living as a renter. Renters get several utilities for free, but the homebuyer would need to pay for them. Examples could be water, gas and electricity bills. With homes bought on mortgages, the resident would also need to conduct repairs and maintenance, which were not the responsibility while renting out a house.
An often neglected part of the mortgage is mortgage insurance. All lenders make it mandatory for borrowers to purchase mortgage insurance in case of any eventuality. If the mortgage is a high-ratio mortgage, then this amount could be very high.
So, the first time homebuyer should not just take the rent to compare with how much payments he/she could afford, but consider all other expenses as well. Only then would he/she not feel the pinch of the mortgage payments month after month.
The lender should also be sympathetic with first time homebuyers. You could find this out in the way they carry the preliminary discussions itself. If they are too highbrow to condescend to first-timers, then you are well off with another lender. Talk to them in detail about the packages they offer, and the features of the loan, so that there are no misunderstandings later. It is wisest to take copies of everything that is related to the loan.