Getting a loan in today’s tight credit market can be a daunting task. It is difficult to be on the “asking” end, especially when it comes to money, but unless you welcome harsh “surprises” in the future, it is always best to perform what is called “due diligence” during the process to make sure that you are getting the best deal in the long run. Lenders have a “bag of tricks”, each one designed to make them more money or pay a higher commission when the loan is finalized.
1) Comparison Shop: We often shy away from shopping for a lender, but the Internet has many loan search services that make this process much easier today for simple lines of credit to a business loan or merchant cash advance.
2) Interest Rate: This is the key variable to understand. Government rules dictate how an “APR” (“Annual Percentage Rate”) is calculated so that you can compare the figures from various lenders. If the lender presses for a higher rate package, it is because he earns a higher commission for it.
3) Variable or Fixed: Loans come in a variety of forms, but they are often packaged in a confusing manner to the lender’s benefit. If interest rates are to vary over time, understand how, when, and on what basis the changes will occur.
4) Term: The shorter the term, the less interest you will pay in the long run. The term and interest rate will dictate the amount of your monthly payment, so be sure to review these calculations closely.
5) Teaser Rates: Many slick marketing agents have designed loans to begin with a very low monthly payment by offering low or no interest to be paid at the beginning of the loan. These programs have led to financial disaster for many consumers that did not understand when the rates would change and how much their monthly payments would increase.
6) Prepayment Penalties: Over the term of the loan, you may wish to refinance when your finances and the rate market warrants. Many lenders bury large prepayment penalties within their loan documents to cover commissions and other costs they incur up front. Be sure you understand your lender’s requirements.
7) Other Fees: Be sure that all fees are disclosed up front. If you have a merchant cash advance be sure to understand how payments and fees will be applied. If there is hesitancy in this area, then beware. Many times the loan agent is not an employee of your eventual lender, so it is best to see everything in writing before making a decision.
8)Credit Insurance: As when you buy a car, the salesman tries to sell other things that you do not want or need. Credit insurance is to protect the lender. It is extremely expensive, and why isn’t interest enough?
9) Loan Documents: No one likes to read the small print. You want to sign and get your money, but wait! There may be surprises in various terms and conditions that only appear in the legal contract. Once you have signed it, you are obligated by every paragraph. Be wary if your agent rushes you.
10) Your Business Partner: Whom will you be dealing with for the term of your loan? Check with public financial data to verify the safety and soundness of the company and review any testimonials related to customer service, both good and bad.
Tom Cleveland is a writer for SmallBusinessLoansDirect.com. He has over 30 years of experience in executive management, corporate governance and business development.
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