Perhaps you are thinking of starting of starting a new business or you are thinking of expanding an already existing business. You have insufficient capital and are thinking of seeking external funding to make your dreams come true. But there are so many types of loans on offer by different lenders and the funding comes with varying loan costs! Understanding the costs attached to loans can be confusing and daunting but you do not have to worry. In this post, I have compiled some of the top factors that influence the costs of loans by most lending institutions. Scroll on for an informative guide on why your loan is being offered at that cost by your prospective lender.
Top Factors Influencing the Cost of Loans
Before you actually get loan money in your account, there are different costs that arise as your application is being vetted by prospective lenders. Some of the fees added up to your total loan amount by prospective lenders include:
When applying for a loan, the lender usually has to carry out a background check on you and your business in order to gauge your probability of repaying the requested amount on time. To facilitate the requisite checks and compensate for the effort and time of the lender, you are usually charged a processing fee for most loans. This fee is charged regardless of whether a loan request is approved or denied.
This is a fee charged by lenders for the time and effort that they use to verify the authenticity of the documents that you provide to back up your loan application such as financial statements and tax returns.
If you approached a lender through a broker, you may be charged this fee to cater for the cost of paying a commission to the broker. An origination fee is usually charged after your loan application is approved.
If you are using your home or any other asset as collateral for a loan, the lender usually has to see the services of an independent appraiser whom you have to pay.
Once your loan application has been approved, you will be given your loan amount which is typically categorized into two parts. The ‘principal’ and ‘interest’. The principal is the actual amount that you actually applied for while the interest is a fee for the loan that the lender is facilitating.
Loan costs are heavily influenced by the interest rate. Remember that your loan can either come at a fixed or variable rate of interest. If your loan has a fixed interest rate, the total fee that you will eventually pay back with your loan does not usually change no matter what. If your loan comes with a variable interest rate, the total amount that you pay back can vary if the rate gets changed by your lender.
2.Type of Loan
The cost of a loan will vary depending on whether you are taking a secured or unsecured loan. For a secured loan, you have to provide some form of collateral such as an asset to your lender. For an unsecured loan, you do not need to provide any collateral to get a loan.
Secured loans are typically cheaper compared to unsecured loans.
3.Your Credit Rating
If you have a positive and high credit rating when applying for a loan, you are highly likely to get funding at a lower cost compared to when you are making an application at a lower cost. A higher credit rating usually shows that you pose less risk to the lender and that there is a high probability that you will repay the money loaned.
4.The Length of The Repayment Period
The cost of your loan will also vary depending on the repayment period. Loans that have a shorter repayment period typically cost less compared to long term loans. This is because most lenders consider long term loans to be riskier.
There…This article describes some of the key factors that influence the cost of loans. However, there are many more factors that lenders consider. Ultimately the cost of a loan usually depends on your prospective lender.