We’ll get to the point: LightScream offers the best overall online personal loans, in our opinion. We fully explore LightStream, with its pros and cons, later in this post. We also look at the best online loans for average credit (Avant) and the best online loans for peer-to-peer lending (Lending Club).
In this post, we look at how to get an online loan with bad credit, the pros and cons of an online personal loan and how you should choose the right online personal loan. We also look at the best lending options for your specific situation.
Our SimpleScore
We have a proprietary scoring model, called the SimpleScore, that we use to analyze lenders so we can pick the best financial products for your specific needs. We talk more in detail about this model at the end of the post, but in a nutshell, this is what we look at: rates, fees, loan size, customer satisfaction and support.
What is an online loan?
Online loans are an alternative for borrowers who prefer the convenience of virtual lending. Just like you can apply for a loan through a traditional financial institution, online loan companies exist to help borrowers looking for an accessible way to borrow. The best loans online boast low fees, low interest rates, great customer support and loans that can do everything from financing a remodel to helping you get out of debt.
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We found results in California.
The 7 best online lenders of 2021
| Lender | APR | Loan Amount | Terms | Fees |
|---|---|---|---|---|
| LightStream | 2.49%–19.99% w/Autopay | $5,000–$100,000 | 2–12 years | None |
| Marcus by Goldman Sachs | 6.99%–19.99% | $3,500–$40,000 | 3–6 years | None |
| SoFi | 5.99%–18.85% w/AutoPay | $5,000–$100,000 | 2–7 years | None |
| Payoff | 5.99%–24.99% | $5,000–$40,000 | 2–5 years | 0%–5% origination fee |
| Upgrade | 5.94%–35.97% | $1,000–$50,000 | 3–5 years | 2.9%–8% origination fee; $10 late fee |
| Avant | 9.95%–35.99% | $2,000–$40,000 | 2–5 years | Up to 4.75% administration fee |
| LendingClub | 8.05%–35.89% | $1,000–$40,000 | 3–5 years | 2.%–6% origination fee; 5% or $15 late fee |
*Rates accurate as of May 2021
The 7 best online lenders of 2021
Best overall – LightStream
LightStream offers borrowers with established credit promising personal loan terms. If you have great credit, this is a prudent option that eliminates frittering away money on fees and high interest rates.
Borrowers with strong credit scores and long credit histories can benefit from LightStream’s lack of fees, low rates and high loan amounts.
LightStream offers borrowers large loan amounts for loan consolidation, home improvements and big-ticket expenses. Interest rates vary based on the purpose of the loan, the terms, amount borrowed and your overall creditworthiness.
One of the best features of this lender is that they will beat a competitor’s interest rate by one-tenth of a percentage point, assuming the terms of the loan are the same. Unfortunately, LightStream doesn’t offer pre-qualification, so borrowers can’t determine their likelihood of getting approved without a hard pull on their credit.
How should I choose the right online loan?
To choose from the best personal loans available online, think about the main reason for your loan in the first place. Are you looking for a personal loan to fund a home improvement project? Are you looking to consolidate your credit card debt? Online lenders often specialize in a specific type of loan.
After you know what kind of loan you want or need, evaluate your credit score and history. If your credit score is poor, pause on your loan applications and focus on rebuilding your credit first — otherwise, you’re unlikely to get approved by any lender or you may be stuck with a higher interest rate.
Once you’re ready to apply, gather all documentation required to complete the loan application process. You’ll need an official form of identification, proof of income and other financial paperwork.
[Read: When Is an Emergency Loan a Good Option?]
What you should know about online loans
Before applying for an online loan, there are a few things you should know. Online loans are similar to traditional loans secured in-person in that lenders will run your credit and some may require you to have a cosigner if you have a less than ideal credit score.
Where they differ is that online lenders tend to allow applicants to prequalify for a loan which is a helpful tool for borrowers shopping around for the best deals. Furthermore, as their name suggests, online loans are originated entirely online — including the application, approval and final document signatures. This is extremely convenient for some borrowers who prefer digital banking.
Paying attention to these pros and cons of online personal loans will make finding the best online lender even easier.
What are the pros of an online personal loan?
Online personal loans are easily accessible and convenient alternatives to traditional loans where one would normally have to walk into a credit union or bank branch to apply. It’s especially advantageous if you’re not a member of a local bank because, with an online lender, you might be able to find lower interest loans online. Depending on your location and credit score, this could be a dealmaker.
Online loans usually have a prequalification process, which involves using a soft credit check to see if you can be approved. This is great because it doesn’t adversely affect your credit score. That way you don’t waste time getting too far into applying for a loan for which you could be denied or do a hard pull on your credit, potentially damaging your credit score. Another bonus is that many lenders offer interest rate discounts if you sign up for automatic payments.
What are the cons of an online personal loan?
While there are plenty of benefits to using online personal loans, borrowers should watch out for the cons as well. The internet is, unfortunately, full of people and groups who want to take advantage of the unwary. This includes online loan scams, such as equity stripping, bait-and-switch schemes, loan flipping, packing a loan with charges you did not request, and hidden balloon payments.
Another con to be aware of is customer support. While it’s convenient to get funding online with a simple application and signature, if you ever run into trouble with your loan, you can’t walk into a bank branch and request in-person help. You’re stuck with online chat or a phone call — which could translate to hold times and shoddy service.
How to get an online loan with bad credit
If you have poor credit but you need a loan to help you get out of debt or money for an emergency, it’s still possible to obtain a loan. Lenders that offer bad credit loans will still evaluate your credit history but will have less strict underwriting requirements. In some cases, these lenders will also consider other factors outside of your credit scores to determine your approval for a loan, such as your income.
Although you might find a lender willing to approve a loan for you, there are some drawbacks to consider. In many cases, you’ll be saddled with a much higher interest rate, typically above 20%. For borrowers, that means it’s much more expensive to borrow money.
Lenders who work with borrowers with poor to fair credit include LendingClub, Avant and Upgrade. You’ll need to research each lender’s requirements before applying.
One note of caution: watch for red flags and predatory loan schemes like payday loans targeted at borrowers on the hunt for bad credit online loans. While they may offer you enticing upfront sums, the terms and conditions associated with them often take advantage of those in vulnerable financial positions.
Things to keep in mind
Before you decide to get an online loan, consider all the different variables involved.
- Soft credit checks versus hard credit checks: If a lender offers pre-qualification, you can get a good idea of whether or not you’ll be approved for a loan without a “hard pull” on your credit. A hard pull can result in a temporary decrease in your credit scores. If the lender doesn’t offer prequalification, you’ll go directly to the “hard pull” stage where the lender conducts a hard inquiry.
- Loan terms: Remember to take the time to parse through the loan terms and conditions, otherwise known as the fine print of your loan. Can you change the payment date? What happens if you lose your job? How long is your loan for? These are all questions you should have an answer to.
- Payment portals: Does the lender offer a user-friendly payment portal laying out the framework of your loan terms and showing you where and how to pay? The ease and convenience of paying your loan is an important consideration.
- Autopay discounts: Many lenders offer interest rate discounts if you opt into auto-pay.
- Fixed-rate versus variable-rate loans: Fixed-rate loans mean your monthly payments and interest rate stays the same over the life of the loan. Variable-rate loans mean your interest rate, and therefore your monthly payments, may fluctuate month to month.
- Fees: Some lenders don’t charge for late payments or even missed payments, but you need to double-check the terms outlined by your lender.
- Early payoff penalties: Paying off your loan early is good, right? Well, in some cases, a lender can charge you a penalty fee for “shortchanging” what they’d make on interest for the time period you’d still be paying the loan.
[ Read: How No Credit-Check Loans Work ]
Too long, didn’t read?
To find the right loan and online loan lender, approach your decision with a patient mindset. First, you’ll want to establish what the loan is for and evaluate your finances to determine if you’re in a financial position to pay a monthly loan bill on top of your other debt obligations. Then, you can shop and compare to determine the best online loan option for your specific situation.
We welcome your feedback on this article and would love to hear about your experience with the personal loans we recommend. Contact us at [email protected] with comments or questions.
Source: thesimpledollar.com
Should You Make Extra Payments on a Low Interest Loan?
If there’s one personal finance tenet you’ll see almost universal agreement on, it’s that you should pay off your high interest debts first and keep them paid off. Accumulating high interest debt is devastating to your finances because of the sheer amount of money that it drains from your checking account with nothing in return.
What about low interest debts, though? What if you have a debt that’s locked in at 3% or 4%? Does that debt need to be paid off, too? Also, where exactly is that line between high and low interest debt?
Before we dig in, let’s be clear about the benefits of making extra payments on a debt. When you get a bill for a debt in the mail, there are two key numbers you’re looking at. The first is the principal or balance, which is how much you currently owe. The second is the interest. That’s how much extra you owe that’s built up since your last payment. It’s based on multiplying your principal by the interest rate.
For example, if you owe $1,000 at a 12% annual interest rate, and you’re making payments once a month, your interest on your next payment will be $1,000 times 0.12 (that’s 12%) divided by 12 (because it’s one month out of the 12 months of the year), meaning you owe $10 in interest.
This is important because the amount of interest you owe each month goes down when you pay off principal. If you reduce that principal to $500, you only owe $5 in interest that month. Extra debt payments go entirely to the principal, making it that much smaller. Thus, when you make an extra debt payment, you’re lowering the amount of interest you pay every single month going forward (assuming you don’t add more to that debt). That’s why it’s so powerful!
What is a “low interest debt”?
A low interest debt is any debt with an interest rate lower than what you could easily get with an investment. Depending on your perspective on investments, that number is somewhere between 7% and 12%. Warren Buffett projects that future investment returns should come in around 7% a year, so 7% is a pretty safe cutoff between low and high interest debt.
You should pay off high interest debt as fast as possible, because you essentially can’t do better than that through investing without some significant luck. It’s a pretty good guaranteed rate of return on your money (assuming, again, that you’re not accumulating any more high interest debt).
With low interest debt, it gets a bit trickier, as there are both pros and cons to paying off low interest debt early. Some people even consider low interest debt to be “good debt” because of some of the drawbacks.
Pros of paying off a low interest loan early
Benefits of paying off a low interest debt early include:
- Fewer monthly bills, which means less financial stress any way you slice it. Simply having to come up with less money for bills each month is always a help.
- Improved cash flow, which happens as a result of shrinking or eliminating bills. If you pay off any debt, you have a smaller stack of bills to pay off each month, which means that you can survive and thrive on a smaller amount of income or have more money available to save for long-term goals.
- Financial progress happens even when you pay off a low interest debt. That’s money that’s not disappearing in the form of interest.
Cons of paying off a low interest loan early
Drawbacks of paying off a low interest debt early include:
- Locked-up money, because money that could have been easily available in a savings account is now “tied up” in your loan. For example, you could have a $5,000 debt and $1,000 in savings, or a $4,000 debt and $0 in savings. While it’s nicer to have lower debt, it also means you don’t have that $1,000 easily accessible for emergencies, and that could turn quickly into credit card debt in an emergency.
- Opportunity cost, which is an extension of the ‘locked-up money” problem. If you pay down a debt, that means that you don’t have the cash on hand to take advantage of an opportunity. If you put that $1,000 into a loan, you might not have $1,000 to take advantage of a great deal on replacing your fridge that’s nearing the end of its lifespan.
Don’t pay off a low interest loan early
If you do not have any other financial plans, the best strategy is to pay off high interest loans first, then make minimum payments on low interest loans and do other things with what would have been an extra payment, like building an emergency fund or bumping up retirement contributions.
An emergency fund is useful because it’s a buffer that keeps you from taking on high interest credit card debt in an emergency. For example, if your car breaks down and needs to go to the shop, you can just tap a cash emergency fund instead of putting a balance on a credit card. This should be a top priority once you have high interest debt under control.
If you have an emergency fund, transition to making sure that your retirement savings are well taken care of. Bump up contributions to your workplace retirement plan. If they offer matching funds, contribute enough to get every dime of it.
Except in these situations
Are there times when you should consider paying off a low interest loan quickly? The only time you should consider such a move is when you already have an emergency fund and you know that your monthly income is about to drop.
For example, if you have a few months of living expenses saved up and you’re considering a career change or a job change, then having lower monthly bills makes it much easier to move into a period where there might be less income moving in. Another example is if you’re about to retire with a fixed income, such as a pension, where you know that your monthly income will be lower and month-to-month survival is much easier if you have fewer bills.
In those situations, however, you should prioritize a healthy emergency fund over paying off low interest debt. Only pay off the debt if you have a few months of living expenses set aside in case things go badly.
Too long, didn’t read?
While there are some benefits to paying off a low interest loan quickly, there are many other things that are more useful to do with your money, such as building an emergency fund and contributing to retirement savings. Only pay off a low interest loan quickly if you anticipate a reduction in income level in the near future.
We welcome your feedback on this article. Contact us at [email protected] with comments or questions.
Source: thesimpledollar.com
Mint Money Audit: 4 Steps for Getting Out of Debt Once and For All
March Mint Audit: Samantha, mom of two, struggling to pay off $41,000 in credit card debt
Samantha contacted me recently to ask how she and her husband could squash their $41,000 in credit card debt once and for all. She works as a media trainer for executives. Her husband works for the city government. Together they earn an annual net income of about $100,000 (after taxes, retirement savings and health insurance).
They more or less live paycheck to paycheck after accounting for all their bills and expenses. They have $1,000 in savings.
More about Samantha’s family: The couple has two kids, ages 10 and 14. Their children have various expenses tied to sports, activities and birthday parties, which Samantha says can really take a big bite out of their remaining monthly funds.
Here’s a snapshot of their top monthly expenses:
- Mortgage: $3,300 (including property taxes)
- Car payments, including loans, EZ Pass, insurance and gas for 2 cars: $1,500
- Groceries: $1,200 per month
- Credit Card Debt Minimums: $1,100
- Utilities: $630 (includes cable, internet, energy and water)
Here’s my four-step plan on how they can adjust their finances to tackle credit card debt to become debt-free in four to seven years and save another $7,500 (or more) over the next year for a rainy day.
Step 1: Get Organized. Consolidate Debt.
Part of their debt overwhelm is not just the hefty $41,000 balance. It’s the number of credit cards they posses: 11 cards in total. That means they receive 11 separate bills every month (at likely various times), which makes the debt very hard to track and analyze. It also makes it challenging for them to create a payoff plan. It may be why they resort to only paying the minimums on each card.
My advice: Consolidate all the credit card debt into one (or two) personal loan. The average interest rate on their credit cards is about 19%. Begin by reaching out to a local credit union or community bank to see if the couple can qualify for a personal loan for $41,000 and an interest rate at or below 19%. (The higher their credit score, the more likely they can qualify for personal loans with attractive interest rates.)
You can search for competing loan offers on Mint, too. Also, a new online lender on the market, Marcus.com (a division of Goldman Sachs) is promoting fixed-rate, no-fee personal loans of up to $30,000 for those who want to eliminate high-interest credit card debt. At LendingClub, a peer-to-peer lending marketplace, you can also apply for loans of up to $40,000.
Using this loan to pay off all their credit card balances, leaves them with 10 fewer bills each month. Even if they need to take out two personal loans (because $41,000 may be too high a loan for one bank to lend), it’s better than their current scattering of bills.
One thing to watch out for when applying for a personal loan: Some lenders may charge an origination fee of up to five or 6% of your loan balance, depending on your credit rating. Shop around and ask for fee waivers. You can also use a loan calculator to determine how long it will take to pay the personal loan off.
Step 2: Dedicate One Paycheck Mostly to Debt.
To further simplify the family’s effort to become debt-free fast, I suggest one spouse’s income be allocated towards the consolidated debt while the other spouse’s income cover most of the necessities. By dedicating one income stream to the debt, it’s again, easier to track.
Let’s pick Samantha’s husband, who brings home anywhere from $3,000 to $4,000 a month, depending on his overtime schedule.
If the couple can score a loan with, say, a 15% interest rate and a seven-year term, that equates to a minimum monthly payment of about $800 a month for Samantha’s husband. By allocating an extra $300 a month to the principal (for a total of $1,100 or what they’re currently paying), they can be debt-free in closer to four years.
With around $2,000 left in his monthly paycheck, Samantha’s husband can also contribute to groceries ($1,200) and utilities ($650). That leaves $150 for savings. With his overtime income (up to $1,000 per month), I suggest he funnel that also into a savings account.
Meantime, Samantha, who brings home roughly $5,000 per month, can dedicate her income to the mortgage ($3,300) and car payments ($1,500), with roughly $200 left over for savings.
Cash Savings: $350 – $1,350 per month
Step 3: Reduce Utilities & Food
Also, is there any way they can knock down food and utility expenses? (My recommendation is to nix cable. We did this a few months ago, but with an Apple TV, an $8 monthly Netflix subscription and loads of free apps, we don’t miss much. That move alone could save the family $200 per month or $2,400 a year.)
The family’s food budget currently eats up 15% or $1,200 of their take-home pay. But to live below your means, food budgets should amount to no more than 10% of one’s take-home pay. If they can stay below that limit, they could save $400 per month.
Cash Savings: $600 per month
Step 4: Budget for the Sometimes Extras
Using Mint’s budget meter, create a spending cap for other miscellaneous spending categories. From birthday gifts to sports team fees and equipment, keep a close eye on these expenses. From the $950+ in monthly savings the family may start to accumulate with my advice, they could ration out a few hundred dollars per month for these incidental costs and still end up with another $7,500 or more in savings within a year.
Finally, when their children can start working, encourage them to find summer jobs to help pay for their school year activities. That can also help the family save much-needed cash for their debt and savings.
Have a question for Farnoosh? You can submit your questions via Twitter @Farnoosh, Facebook or email at [email protected] (please note “Mint Blog” in the subject line).
Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.
Source: mint.intuit.com
Fixed and Variable Rate Loans: Which Is Better?
Reading over your loan options can feel like studying a foreign language. What is a fixed vs. variable loan? And what on earth is a rate index? Whether you are taking out a home loan or financing your next vehicle, you’re bound to come across some of the same terms.
Having a fixed-rate loan is right for people who can lock in a low rate and have never been one for gambling. But that’s not to say that variable-rate loans don’t have their advantages. Let’s talk about the differences between these two loan types and what they can mean for your financial bottom line.
What is a fixed-rate loan vs. a variable-rate loan?
The main difference between a fixed-rate loan and a variable-rate loan is that your loan payment remains the same with a fixed rate and may fluctuate with a variable rate.
Let’s look at an example.
Imagine you get a mortgage with a 2.75% interest rate over 30 years. Your bank will calculate your monthly payment, and it will remain the same over the entire term of your loan. Now let’s say you’re offered a variable-rate loan at 2.5%. That sounds appealing, but as interest rates rise in the real estate market, your rate could go up. Within five years you might be paying closer to 3.25% interest and owe a few hundred dollars more each month.
| Fixed-Rate Loan | Variable-Rate Loan | |
| Rates | Stay the same over the course of the loan | Fluctuate according to market conditions |
| Loan Amounts | Vary by type of loan | Vary by type of loan |
| Terms | Remain the same for up to 30 years, depending on the type of loan | Change based on market conditions, and may include a balloon payment at a designated time |
[ Read: Best Auto Loans ]
Understanding fixed-rate loans
What is a fixed loan? As mentioned above, a fixed-rate loan is one in which the consumer (that’s you) locks in an interest rate when they finalize their loan. That interest rate remains stable throughout the life of the loan unless you refinance.
Fixed-rate loans are popular when it comes to financing ranging from auto loans to mortgages to personal loans. They are ideal for the risk averse or anyone who is lucky enough to be financing when rates are at historic lows. Many businesses also opt for a fixed-rate business loan because reliable loan payments make it easier to forecast future expenses and create profit goals.
However, on the downside, a person locked into a fixed-rate loan may end up paying a higher-than-average interest rate if the market rates drop. For instance, a consumer who obtained a 48-month auto loan in the first quarter of 2020 would have likely been offered a 5.29 percent interest rate (based on average rates from commercial banks). A few months later, the average rate for the same loan had dropped to 5.13%. If locked into a fixed-rate loan, this consumer would be paying more per month than someone who got a loan in the following quarter.
Understanding variable-rate loans
What is a variable loan? One of the primary benefits of a variable-rate loan is that the initial interest rate is often lower than what you’re offered for fixed-rate loans. This can be appealing for consumers who are on a tight budget. However, variable-rate loans don’t remain stagnant.
Most variable-rate loans fluctuate based on something called the prime rate. The prime rate may also be called the base rate. This rate is determined by individual banks, but influenced by the federal funds rate (this is the rate banks charge each other for short-term loans).The Fed, short for The Federal Reserve System analyzes current economic conditions eight times throughout the year and adjusts the federal funds rate accordingly. As the federal fund rate rises or falls, so typically does the prime rate that directly affects variable-rate loans.
You may be offered variable-rate loans for a variety of funding, but usually these loans apply to long-term loans. Student loans and home loans are the most likely to offer adjustable rates. Home loans may have a fixed rate for a set period initially (often five years) at which point the rate is subject to change. After the housing bubble burst in 2008, only 10-15% of buyers chose a variable-rate mortgage between 2008 and 2014, despite the fact that historically up to 30% of buyers had opted for an adjustable rate.
What are interest rate caps?
If you choose a variable-rate loan, your lender will outline the interest rate caps as a part of the loan terms. You can think of these caps as ceilings on the interest rate. An interest rate cap can affect how high your rate is able to rise, or how many points it can increase at once.
There are three main types of interest rate caps. The initial adjustment cap affects how much your interest can increase when the fixed-rate period ends. Often, this cap says that your interest rate can’t go up by more than a few percentage points when the fixed term ends.
After this initial period, you may also have a subsequent adjustment cap. This outlines how many points your interest can increase at once for every future period.
Finally, there is a lifetime interest cap. This is the rule that spells out how much your interest rate can increase over the initial rate for the entire loan. For instance, your lender may agree to never increase your interest rate to more than 5% over your original interest rate. If you paid 2.75% at the start of your loan, your interest rate would never be above 7.75%.
[ Read: Best Personal Loan Rates for 2021]
Should I get a fixed-rate or a variable loan?
Whether you should get a fixed-rate or variable-rate loan depends on a variety of factors. If you’re on the fence, consider these insights as you navigate the loan application process.
| Loan Type | Fixed Rate Loan | Variable Rate Loan |
| Personal | Good for consumers with good credit who can access low rates | Good for short-term loans when the rate doesn’t have much chance to fluctuate drastically |
| Student | Best when variable rates are high and a precise budget is a priority | Best when fixed rates are currently high and are likely to drop |
| Mortgage | Ideal for buyers who are planning to stay in the home for the long term | Only works for buyers who can handle a higher payment than they currently pay |
| Business | Great for small businesses who need a reliable budget in order to make ends meet | Great for thriving businesses who believe interest rates will drop and can get approved for a refinance if rates increase |
Too long, didn’t read?
Fixed-rate loans have reliable rates and can be great for consumers who need stability. Variable-rate loans fluctuate over time based on the prime rate, and could be good if rates are projected to drop. Variable rates are safer for short-term auto loans, personal loans, and other financing.
We welcome your feedback on this article. Contact us at [email protected] with comments or questions.
Source: thesimpledollar.com
What Is Mortgage Recasting and How It Can Save You Money
If you are eager for a way to save money on your mortgage, one popular option is through mortgage recasting, or when a large payment allows you to re-amortize your mortgage and reduce your monthly payments. Here, we go through the pros and cons to recasting a mortgage.
What is mortgage recasting?
Mortgage recasting, also known as mortgage re-amortization, is when a borrower makes a lump sum payment toward their home loan balance. The lender re-amortizes the loan, and the borrower’s monthly payments are adjusted, though the interest rate and loan term stay the same.
Recasting saves borrowers money in two different ways. First, re-amortizing the loan based on the new principal balance reduces a borrower’s monthly payments. The homeowner will also save money on interest over the course of their loan since there’s a lower balance to accrue interest on.
Many lenders allow borrowers to recast their mortgages, including those purchased by Fannie Mae and Freddie Mac. However, government-backed loans such as FHA loans and VA loans aren’t eligible.
[ Read: Compare Today’s Best Mortgage Rates ]
How does mortgage recasting work?
Suppose a mortgage borrower had a current principal balance of $200,000 with a 30-year term and an interest rate of 3.5%. If they continue making their regular mortgage payments, they can expect monthly payments of about $898. By the time they pay off the full mortgage, they’ll have paid around $123,000 in interest.
But imagine instead that they spend $30,000 to recast their mortgage, bringing their new principal balance down to $170,000. Using the same 30-year term and 3.5% interest rate, their new monthly payments will be just $763 per month. And they’ll ultimately pay about $105,000 in interest, saving themselves about $18,000.
Pros of mortgage recasting
Mortgage recasting can be an excellent way to help homeowners save money on their home loans. Similar to mortgage refinancing, it can help borrowers pay less money in interest. There are a handful of benefits to recasting and a couple of reasons why homeowners might prefer it over refinancing.
- Lower monthly payments. Recasting your mortgage reduces your monthly payment because it takes a smaller principal balance and spreads it across the same loan term.
- Less interest paid overall. Because of the new lower principal balance, mortgage recasting results in paying less interest over the course of the loan.
- Fewer requirements than refinancing. Mortgage refinancing comes with many hoops to jump through, including an appraisal and qualifying for a new loan. Recasting is far simpler, and you don’t have to meet special financial requirements.
- Less expensive than refinancing. When you refinance your mortgage, you have to pay a whole new set of closing costs. Mortgage recasting only comes with a small fee.
[ Read: Compare Today’s Best Mortgage Refinance Rates ]
Cons of mortgage recasting
Despite its perks, mortgage recasting isn’t right for everyone. In some cases, an alternative such as refinancing might be a better fit.
- Mortgage recasting fee. When you recast your mortgage, you’ll have to pay a small fee, often around $250. While this is significantly less than the amount you’d pay in closing costs to refinance a mortgage, it’s still something to consider.
- No reduced interest rate. When you refinance your mortgage, you often get the benefit of a lower mortgage interest rate, which can save you 10s or even hundreds of thousands over the life of the loan. Recasting doesn’t lower your interest rate — it only reduces the principal balance that accrues interest.
- No shortened loan term. Mortgage recasting doesn’t shorten your loan term. If you had 20 years left on your loan, you still have 20 years left after recasting. However, your new lower monthly payment leaves more money available in your budget, so it may be easier to pay your mortgage off early.
- Not available for all mortgages. Not everyone is eligible to recast their mortgage. Government-backed loans such as FHA loans and VA loans generally aren’t eligible. However, those mortgages are eligible for refinancing, so homeowners with those types of home loans may consider that instead.
Qualifying for mortgage recasting
Not everyone is eligible for a mortgage recasting. It’s best to talk to your lender about their requirements and find out whether you qualify. Here are some common requirements you’ll likely run into:
- No government-backed loans: Government-backed loans such as FHA loans and VA loans aren’t eligible for mortgage recasting.
- Recasting with your current lender: Not all lenders offer mortgage recasting. And unlike mortgage refinancing, you can’t simply recast with a different lender than the one that services your loan.
- Recasting minimum: Many lenders require borrowers to make a minimum recasting payment. Lenders typically require that your payment is at least $5,000.
- Equity and payment requirements: Some lenders may have requirements stating you must have a certain percentage of equity in your home or that you have made a certain number of on-time payments before recasting.
- Recasting fee: Most lenders charge a small fee to recast your mortgage. The fee is typically around $250, meaning it’s a drop in the bucket compared to the lump sum payment you’ll make. But it’s important to be aware of and budget for this fee.
[ Read: Best Investment Property Mortgage Rates ]
Compare top mortgage lenders
Too long, didn’t read?
Mortgage recasting involves a borrower making a single lump-sum payment to reduce their principal balance. The lender re-amortizes the loan, meaning the borrower’s monthly payment goes down. Recasting can be a good way to save money and a feasible alternative to refinancing, but it’s not right for everyone. Some borrowers may not be eligible, and others may get a better deal if they refinance their mortgage.
We welcome your feedback on this article. Contact us at [email protected] with comments or questions.
Source: thesimpledollar.com
Financing Home Improvement Projects During Coronavirus
Many of us are home much more than usual these days, and you may be thinking about ways to improve your home — whether it’s expanding your new home office, upgrading your air conditioning, or putting in a new swimming pool for the summer. It’s easy to dream about those fun new projects, but figuring out how to pay for them can be a challenge.
It’s not just your lifestyle that’s been impacted by the coronavirus pandemic. Many banks, lenders, and fintech companies are changing the way they lend money to customers, so your options for financing a home improvement project may have changed.
In the first few months of the coronavirus outbreak in the United States, many lenders pulled back on Home Equity Lines of Credit and Cash Out Refinances — either halting new applications or tightening the approval criteria. The best financing options may be changing based on what’s available at a given time, so take the time to investigate what is going on in the market and what your options are. Here’s a place to start.
This article will walk you through:
- Key questions to ask yourself when evaluating your financing options
- 5 financing options you might be considering, and the pros and cons of each option
- HELOC
- Cash-out Refi
- Personal Loan
- Traditional Credit Card
- Fintech Alternatives
What questions should you ask yourself when choosing a financing option for your home improvement project?
- Are you in a hurry to get started? Do you need to replace a major appliance immediately, or do you have some time before construction begins? Some financing is faster than others, but you may pay a price for speed.
- Will your costs happen all at once or overtime? If your project will have ongoing costs (like many home improvement endeavors) it might be attractive to only pay interest on what you’ve spent and to have the flexibility of revolving credit that allows you to spend, pay it back, and spend again.
- Is the cost of your project a sure thing or will it creep up? Even the best budgets have surprises. Choosing a more flexible financing option now may prevent you from having to apply for credit again later, which may save you money and limit hard inquiries which can ding your credit score.
- Do you have equity in your home you can tap into? Do you want to? Financing that relies on the equity in your home often has lower interest rates than unsecured options. If you have equity available in your home, are you comfortable using your home as collateral and potentially risking foreclosure if you can’t make your payments?
- How much flexibility do you need in your monthly payments? In a time of uncertainty, it may be more attractive to choose an option with fixed rates and payments that you can plan around.
- What is available in the market right now? In a time of unprecedented uncertainty, many lenders have temporarily stopped offering certain products or seriously raised the bar for what it takes to qualify. Make sure you aren’t counting on funding from a financing product that isn’t available anymore. What are your financing options? The news about COVID-19 changes daily, so keep in mind that the economy, stock market, and the lending policies of various lenders may change.
What are your financing options?
The news about COVID-19 changes daily, so keep in mind that the economy, stock market and the lending policies of various lenders may change.
1. Home equity line of credit (HELOC)
What is a HELOC and how does it work? A HELOC is a revolving line of credit (like a credit card), which means you can borrow as much as you need, when you need it, up to the limit on your credit line. As you pay down the balance, you can borrow more money again.
Your credit line is based on the equity in your home and your credit, so you must own your home and have some equity built up in order to qualify for a HELOC.
What are the Pros and Cons of a HELOC?
Great for:
- Projects with ongoing expenses — flexibility to spend, pay down the balance, spend again
- Paying less interest — lower rates than most unsecured products, and revolving structure where you only pay on the amount you’ve borrowed
- Tax deductions — some opportunities for a tax deduction of interest, depending on how the funds are used
- Renters, as they are not eligible for dwelling-secured financing
- Homeowners worried about foreclosure risk
- Fast funding — underwriting and appraisal process means it can take weeks to get your money
- Payment- or rate-sensitive people — rates are typically variable so may rise
- People looking for financing right now — several banks halted new HELOC applications in May in response to the COVID-19 pandemic so availability may be very limited.
2. Cash-Out Refinance
What is a cash-out refinance and how does it work? A cash-out refinance is when you replace your existing mortgage with a new mortgage for more than you owe on your home. The difference goes to you in cash, which you can spend on whatever you want.
Your cash out amount is based on the equity in your home and your credit, so you must own your home and have some equity built up in order to qualify for a cash-out refinance.
- Paying less interest–rates typically lower than unsecured products and many HELOCs
- Simplified, predictable payments — single monthly payment for your mortgage and your home improvement project, with fixed rates widely available
- Tax deductions — some opportunities for a tax deduction of interest, depending on how the funds are used
- Renters, as they are not eligible for dwelling-secured financing
- Homeowners worried about foreclosure risk
- Payment- or rate-sensitive people — your rate on your entire mortgage may go up due to a higher loan amount
- Fast funding — underwriting and appraisal process means it can take weeks to get your money
- People looking for financing right now — due to COVID-19, many lenders have tightened requirements for mortgages in general and cash-out refis in particular
Cash-out refinancing can be an affordable, fixed-rate option for financing your home improvement project but the process may take considerably longer than it would have during pre-pandemic days and the requirements may be more stringent.
3. Personal Loans
What is a Personal Loan and how does it work? Personal loans are unsecured loans that you receive as a lump sum of cash to use however you like. They typically have fixed rates and terms, which means you pay the loan back in set installments over a set period of time.
What are the Pros and Cons of a Personal Loan?
Great For:
- Fast funding — approval process is fast and usually 100% online
- Renters, homeowners concerned with foreclosure risk — available regardless of housing status
- Fixed scope of work — lump sum of cash makes it harder to overspend on your project
- Better rates than other unsecured options — rates are generally lower than traditional credit cards
Not Great For:
- Projects with ongoing expenses or unclear scope — lump sum of money can only be used once without borrowing again. May result in additional hard inquiries and a negative impact on your score if you need more credit
- Paying less interest — you pay interest on your total outstanding balance, regardless of how much you’ve spent
- Some homeowners — rates are typically higher than secured options
Bottom Line on Personal Loans
Personal loans are a fast and affordable way to borrow a set amount of money. This may be a good fit for a project with a set budget or a lot of one-time, up-front cost.
4. Traditional Credit Cards
What is a traditional credit card and how does it work? Most of us are familiar with traditional credit cards. They are revolving lines of credit, which means you can spend up to your credit limit, and then pay back your outstanding balance and spend again. They can be used wherever credit cards are accepted, and some offer (expensive) cash options as well.
What are the Pros and Cons of a Traditional Credit Card?
Great For:
- Fast funding — approval process is very fast and many cards are available for instant use
- Projects with ongoing expenses — the flexibility to spend, pay down the balance, spend again
- Pay for what you use — revolving structure means you only pay interest on what you’ve spent
- Potential for attractive short term rates — promotional rates may save you money in interest if you can repay quickly
Not Great For:
- Paying less interest — higher rates than most other options
- Predictable payments — rates are typically variable and can rise
- Overspenders — cards make it easy to overspend and run up unmanageable debt
- Cash expenses — most cards have very expensive cash advances
Bottom Line on Traditional Credit Cards
Traditional credit cards are ubiquitous but expensive. They offer speed and flexibility compared to many other options but they will almost certainly cost you more money.
5. Fintech Alternatives
What alternatives are available?
Online financial technology (fintech) companies offer a variety of financing alternatives that may work well for your situation. Here are a few examples:
- Upgrade Card
- Upgrade Card combines the flexibility of a card (can be used wherever VISA(R) is accepted) with the low cost and predictability of a personal loan (each month, purchases are converted to a fixed-rate installment loan). This option is great for projects with ongoing expenses and for rate-sensitive people looking for quick funding.
- Affirm or Afterpay
- These companies offer fixed-rate installment loans at the point of sale at many retailers. This might be a great fit for a home improvement project with a big upfront cost from a single store (for example, new furniture from one retailer) but offers less flexibility than other revolving products.
- More!
- Fintech companies are always introducing new products, so it’s worth taking the time to see what else is out there.
Bottom Line
Financing your home improvement project during a pandemic may complicate things, but it doesn’t need to hold you back. Don’t be discouraged if the loan you’d planned to apply for isn’t available — take the time to understand your financing options and keep an open mind. There may still be a great way to get the home office or backyard of your dreams!
Source: mint.intuit.com
Pool Loan Calculator: See Your Monthly Payments
Once you have a solid cost estimate for your new pool and you’ve decided to finance it with a loan, the next step is to figure out your monthly payments so you can budget for them.
Enter a loan amount, repayment term, and estimated APR to see how much you might pay each month and the total interest.
How much does it cost to build a pool?
An above-ground pool costs $2,500 on average, according to HomeAdvisor, while an inground pool can run you $50,000 or more. The price can vary based on the size of the pool and materials you use.
When you finance with a personal loan, your annual percentage rate can be anywhere from 6% to 36%, and some lenders will finance up to $100,000 over a two- to 12-year repayment term.
Your credit score is an important factor lenders consider when they decide your loan amount and rate. On average, NerdWallet members with excellent credit (720 or higher FICO) received pre-qualified loan offers with rates between 10.7% and 12.5% in 2020, according to marketplace data. Lenders also consider factors like your income and existing debt.
A $50,000 loan with a six-year repayment term and a 11% APR would require monthly payments of $952. That loan would cost $68,544 in total, and $18,544 of that would be interest.
How to compare pool loans
Here are a few features to consider as you compare offers.
Annual percentage rates: APRs are the best apples-to-apples comparison for personal loans because they include the interest rate and other fees a lender charges. You can use this rate to compare offers between loans or to compare a loan with other financing options like a home equity loan.
Repayment terms: Most personal loan terms span from about two to seven years, but some lenders offer extended repayment terms on home improvement loans. For example, online lender Lightstream lets borrowers choose a repayment term up to 12 years. Your repayment term determines your monthly payment and the loan’s total interest — the longer your repayment term, the more you pay in interest.
Funding time: Some online lenders say they can fund a loan the day your application is approved or the following day. Banks and credit unions, however, can take a few days. Most personal loans can be funded within a week, though.
Ability to pre-qualify: Many online lenders let you pre-qualify to see your potential rate, loan amount and repayment term without affecting your credit score. You can pre-qualify with multiple lenders at once on NerdWallet to nail down another estimate of your monthly pool loan payments.
Source: nerdwallet.com
Popular 2021 Home Upgrades â and How to Pay for Them
Staying at home during the pandemic has changed the way homeowners renovate, but not always in ways you might expect.
You could assume, for example, that homeowners are desperate for privacy and therefore adding more walls.
But interior designer Max Humphrey says rumors of the open floor plan’s death, which bubble up every year, are exaggerated.
“I think middle America still loves their open floor plans,” says Humphrey, who is based in Portland, Oregon. “Designers are talking about how open floor plans are over, but believe me, they’re not.”
Instead, homeowners are creating spaces they’d want to visit if they didn’t live there. Home kitchens have replaced restaurants, and your favorite outdoor bar is now your patio.
Many homeowners paid for their upgrades with savings last year, according to NerdWallet’s 2020 Home Improvement Report. Indeed, if the economic impact of the pandemic hasn’t hit your own finances, cash is the cheapest way to cover home renovations.
But there are also affordable financing options, including cash-out refinancing and personal loans, for those who don’t have or want to use savings.
Here are projects interior designers expect to see more of as the pandemic stretches into 2021, plus financing options to make them a reality.
Whole house renovations
Stephanie Sullivan is busier now than at any time since she became a full-time interior designer in 2014.
Her clients are seeing again the things in their homes they wanted to change when they bought the house but stayed busy enough over the years to ignore.
“It’s amazing how we don’t notice stuff until we’re stuck at home going, ‘hmm, really,’” she says. “So they’ve been walking past it for years, and now everybody’s home and they’re going, ‘Wait, I can’t do this.’”
A homeowner asking her to redesign the entire house is common these days, says Sullivan, who is based in Austin, Texas.
She says multiple clients in the last year have said, “I just need you to start at the front door.”
Fully remodeling most or all of the rooms in your house is likely an expensive endeavor.
If your project is $50,000 or more, certified financial planner Sarah Ponder recommends a cash-out refinance, which involves replacing your existing mortgage with a larger one and using the extra money to renovate.
Cash-out refinance is a good option only if you have enough home equity to match the project cost and if you get a low interest rate — a real possibility given today’s low mortgage rates, says Ponder, whose company, Real Estate Wealth Planning, is based near Austin.
It’ll take patience, too. The refinance process used to take about a month, Ponder says, but lately, it can take two or three months.
Room conversions
Another common request Sullivan says she receives from homeowners: Turn a master bathroom into an at-home spa.
“Since they can’t go to the spa, they’re creating spa retreats in their bathrooms,” she says.
They’re redoing their kitchens as places to connect with family, she says, but they also want their own getaway, even if it’s just upstairs.
Homeowners are also transforming basements and spare rooms into home offices and study rooms, or gyms and playrooms, Humphrey says.
He says his clients are looking for ways to sprawl out.
For midsized projects like one- or two-room renovations, refinancing your mortgage may not be worth the time and effort.
San Antonio-based CFP Tess Downing says a personal loan could work for projects around $20,000. These loans don’t use your home as collateral, and qualifying is based on your creditworthiness and finances. Good credit and little existing debt are must-haves to get a low rate.
Consumers who qualified for a personal loan in 2020 with excellent credit (720 or higher FICO) typically were approved for rates between 10.7% and 12.5%, according to NerdWallet marketplace data.
DIY projects
There are also affordable ways to get a fresh look in your home on a budget.
Replacing light fixtures can make a big difference, says Humphrey, and first-timers can get help from YouTube.
“It’s things that you notice every day, you know, that’s the light in your house,” he says. “Even as a renter, I would swap light fixtures.”
Homeowners can also add a roll of stick-on wallpaper, he says, or a fresh coat of paint. Even new towels, lightbulbs and bedsheets can change the look of a room.
If the cost of your project is below $10,000, a zero-interest credit could be a good pick, Ponder says. If you can pay the balance during the card’s promotional period (often 12 to 18 months) you’ll finish your project interest-free.
More traditional credit cards and store rewards cards can also help you cover purchases on these projects, especially if you have a card with a hardware or furniture store. Be sure you can pay the balance in full each month to avoid interest.
Resale considerations
It’s probably not worth your time and money to go all-out renovating a home you’re going to sell in a couple of years because you won’t make that money back, Humphrey says.
He cautions his clients against overpersonalizing a home they don’t plan to stay in long-term.
“I don’t love to think about resale when I’m designing for somebody, but the pandemic isn’t going to be forever,” he says. “So I do encourage people to think a little bit about resale.”
But for as long as home remains a restaurant, spa, gym, school and office, go ahead and make some changes you can afford just because they make you happy.
Source: nerdwallet.com
Dollar Connect Personal Loans Alternatives
When you need some quick cash to see you through until your next paycheck, personal loans are the best choice. Fast personal loans, like the ones that Dollar Connect used to offer, are a quick way to borrow money in a financial emergency. And if you have bad credit, most lenders can still cater to you.
There are various lenders that have personal loans, and in recent times, Dollar Connect used to be a marketplace for connecting people to such lenders. With the platform shutting down, many people in search of lenders for poor credit and personal loans in an emergency might face inconvenience. At The Simple Dollar, we have rounded up the four best alternatives to Dollar Connect, based on the interest rates, loan amounts, customer satisfaction and support and fees using the SimpleScore methodology.
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The Simple Dollar is an independent, advertising-supported publisher and comparison service. The Simple Dollar is compensated in exchange for featured placement of sponsored products and services, or your clicking on links posted on this website. This compensation may impact how, where and in what order products appear. The Simple Dollar does not include all companies or all available products.
The best alternatives to Dollar Connect personal loans
Compare the best alternatives to Dollar Connect
| Lender | APR | Terms | Loan Amount |
|---|---|---|---|
| OneMain Financial | 18%–35.99% | 24–60 months | $1,500–$20,000 |
| RISE Credit | 50%–299% | 4–26 months | $500–$5,000 |
| LendingPoint | 9.99%–35.99% | 24–48 months | $2,000–$25,000 |
| Avant | 9.95%–35.99% | 24–60 months | $2,000–$35,000 |
Best for joint applications – OneMain Financial
Not all personal loans allow co-signers but OneMain Financial has you covered with its quick and easy loans.
As one of the largest personal lenders in the country, OneMain Financial stands apart from other companies by focusing on customers with poor credit. Headquartered in Indiana, OneMain Financial has offices in 1600 locations across the country, and you do not require a minimum credit score to be able to qualify. The rates are fixed, there are no prepayment fees, and the loan can be repaid in easy monthly payments. Applications can be filed online and loans are usually funded in one business day. The best part? You get to add a second borrower and file a joint application.
All the perks aside, OneMain Financial tends to charge steep interest rates for personal loans. There’s a seven-day grace period but the longer you take, the more expensive the loan becomes. For larger loans, you may also require a collateral, and you must visit the lender’s office to be able to close a loan.
However, you cannot add a co-signer or have your debts paid off directly to the creditors in case of debt consolidation. Avant also charges an origination fee of 4.75%.
Medical expenses
If you or a family member takes ill and requires immediate treatment or hospitalization, it can lead to unforeseen expenses. Even if you have insurance, it might not cover everything. Personal loans are usually funded in less than a day but also come with exorbitant interest rates, which might be more expensive than the cost you are trying to cover. As an alternative, borrowing money from a friend or relative or using your credit card are easier and more flexible ways to get urgent money.
[Read: The Common Types of Personal Loans, Explained]
Emergency repairs
A leaking roof, a burst pipe or a broken car call for emergency repairs. Your insurance might reimburse you later, but when it’s an urgent need, you have to pay out of your pocket. Personal loans are often used for covering such expenses, but the interest rates might leave you with expensive repayments over the next several months. If you have a credit card, you can use it for emergency funding at a much lower interest rate and more flexible terms. You can also borrow money against fixed deposits or sell assets like jewelry or art for quick cash.
Supplementing income after job loss
In uncertain times, being laid-off from work can make it harder to pay for emergency expenses. It isn’t difficult to get personal loans even if you have bad or no credit with no income, but you will be saddled with steep repayments for many months, which can be almost impossible without a job or another source of income. If you’re still taking out a personal loan, it is best to have a collateral and make it a secured loan.
Personal loan FAQs
According to the Federal Reserve, the average rate for a two-year personal loan is 9.65%, though this can vary based on where you live, your credit score and income.
Terms for personal loans can differ from one lender to another, but the typical term is anywhere between 24 and 60 months.
A secured loan, where you borrow money against an asset, is the easiest personal loan to be approved for and much quicker than an unsecured loan. Typical assets you can borrow against include vehicles, jewelry, expensive art and collectibles.
Lenders that offer personal loans of all types are available all over the country. You should choose the lender according to your credit history and if you aren’t sure, it is best to select a bad credit lender. Approval and finding usually take less than a day, and since these are short term lending, they often come without the complicated processes of a traditional loan.
Dollar Connect was not a lender; it was an online marketplace that matched borrowers with lenders. The platform is no longer in business.
Too long, didn’t read?
Personal loans can save you from financial tragedy when you have bad credit but interest rates can be sky-high in most cases. Even in an emergency, it is best to look for personal loans with a reasonable interest rate or alternatives that are easier and more flexible.
We welcome your feedback on this article and would love to hear about your experience with the lenders we recommend. Contact us at [email protected] with comments or questions.
Source: thesimpledollar.com
What Is the Principal Amount on a Personal Loan?
When you choose to take on a loan, whether it is secured or unsecured, one of the top questions you may ask is “how much interest will I pay?” Adding all your monthly payments up will yield a total that includes both principal and interest.
The loan principal is a key part of loan terminology, so understanding what is meant by the principal amount at the beginning of your process as well as throughout your loan will help you make smart financial choices. You can also make extra payments toward the principal on many kinds of loans, an option that can help you pay off your loan early.
What is a principal amount?
The principal on a loan refers to either the entire amount of the loan when it is first taken out, or the amount of the original debt that remains. It is contrasted sometimes with the interest that is paid on the loan, since all of your payments over time will add up to be all of the interest due plus the total principal of the loan.
If you have paid off $2,000 of the principal of a $5,000 loan, you’ve probably also paid quite a lot of interest and you’ll have interest left to pay, but the principal of the loan has been reduced to $3,000.
[ See: How to Calculate Your Loan Payments ]
How do loan principals work?
Your loan principal reduces each time you make a payment, but it doesn’t decrease by the full amount of your payment. If you are making a payment of $500 on a loan each month, you might be paying, for instance, $100 of interest due to the size of the loan. That means that only $400 is applied to the principal of the loan, meaning that it reduces the total amount you owe compared to what you originally borrowed.
While some lenders charge a fee for paying back the principal earlier than the schedule of payments, other lenders allow you to make extra payments for free. If you were to pay $1,000 on the above-mentioned loan, you’d be making your normal payment ($100 in interest, $400 in principal), but you’d also be able to apply the remaining $500 directly to the principal, since you are paying early.
Loan principal vs. loan interest
In most loans, you’ll be responsible for paying a portion of the interest each month in addition to making a dent in the principal. Knowing the difference is important: the principal is the money that you received from the lender, which you pay back in full over the life of the loan. The interest is based on the amount of the loan, length of the loan and interest rate — and this amount will change slightly if you make any early payments.
Is interest tax deductible on a personal loan?
Interest is rarely tax deductible on personal loans, though there are a few exceptions. If the loan was for education or business expenses, there are times when the interest will become tax-deductible. If you take out a personal loan that you use to buy certain investments and are a person who itemizes your deductions, you might also be eligible for an interest tax deduction, but in general, your personal loan interest won’t be a tax deduction.
[ Read: What is a Personal Loan? ]
How to calculate loan principal payments
Over the life of a loan, the percentage of your payment that is interest will go down, and the percentage that is principal will go up.
For example, say you take out a $5,000 loan at 5% interest for five years. The lender will calculate how much interest you’ll owe over time, spread it out over the life of your loan, and divide the combined principal and interest into equal monthly payments. The schedule created is called an amortization schedule.
In an amortization schedule, you’ll pay $94 every month, but at the beginning, that payment will be only $73 in principal and $21 in interest. Over time, your remaining principal goes down, so the assessed interest will also go down. By the last payment, you’re only paying $0.40 in interest because you have such a small remaining principal.
How to pay to the principal
If you’ve chosen to pay over and above your monthly payment schedule on a loan, you can often make an extra payment that goes entirely toward the principal. Here’s how:
- Check with your contact at your lender about its procedures for paying ahead on the principal. The lender may point out that there is a small fee or a special way to make that additional payment, or it may indicate you can simply write a larger check or make a larger e-payment. The additional money will be applied to the principal.
- If you determine that the prepayment penalties on your loan are too high to make it worthwhile, consider opening a high-yield savings account and saving any money you wanted to apply to the principal; you can pay out of that account once you’ve saved up an amount equal to the rest of your payment schedule, effectively ‘paying off the loan early’ without having to pay the prepayment penalties.
- If you do choose to pay on the principal early through your lender, keep track of how many payments you are removing from the end of the schedule. Sometimes paying ahead can be a great feeling, since you are shortening the time you’ll be in debt to this lender.
Let’s say that you have that previously-mentioned, five year, $5,000 loan, and you make a $94 payment every month. If you choose to double your payment for the third month, you’ll reduce the total number of payments from 60 down to 59. What’s even better is that you actually make a little more progress than that, since there will be less time for interest to accrue. Paying ahead on the principal means that, over the life of the loan, you pay less total interest to have received the loan.
[ Next: How to Pay Off Your Car Loan Early ]
Does inflation impact the principal?
Inflation, when a given unit of currency can buy less than it did in the past, tends to benefit borrowers. Inflation is not entirely predictable, but with a fairly stable, low-inflation currency, lenders make interest rate decisions with an eye to expected rates of inflation. Overall, however, buying something with a loan now rather than waiting five years to save up to pay in cash is to your benefit for inflation, since you buy with “now dollars” rather than the depreciated future ones.
Too long, didn’t read?
Your loan principal is an important concept to understand, since the combined costs of principal and interest create your loan payments. Answering “how much interest will I pay?” for a given loan principal can help you make smart decisions about whether getting a loan is really worth it.
We welcome your feedback on this article. Contact us at [email protected] with comments or questions.
Source: thesimpledollar.com