The Costs of Loans

No dodging it: You will probably need to borrow money sometime in your life. Different types of loans come with varying degrees of risk and price, no matter what your income level. Best you know all the catches of a loan before signing on the dotted line.

Most loans are either secured or unsecured. Lenders assume more risk with unsecured loans because they can collect no collateral if you default. Bad loans help drive interest rates’ fluctuation, as lending companies try to recoup lost or dwindling revenues.

Tightening loan restrictions mean that, regardless of your income, you may find it more difficult to secure the money you need. If you’re smart, know before applying for a loan the average lending rates for your particular need. That way, you recognize a good loan offer from one that eventually costs you more.

Interest rates on loans sometimes depend on your credit score. Most lenders require a Fair Isaac Corp. (FICO) credit score of at least 720 to get the lowest rate; some may require a score as high as 750. FICO bases scores on five areas: your payment history, current debt, types of credit used, length of credit history and new credit. 

Federal law also allows you one free credit report annually, which you can receive from AnnualCreditReport.com. This report details your score.

Loans also come with a number of varying hidden costs you must bear in mind. For example, mortgages eventually produce property taxes on a home, insurance premiums for a car and maintenance and upkeep for both. Almost every student loan also comes with fee for everything from disbursement to deferral of payments – the latter also occasioning interest on late payments.

If the loan itself feels like it can strain your budget, remember these and other future costs.

If you decide to move ahead on borrowing, here are the most recent average rates for various types of lending. (Note that rates change very frequently.)

  • Mortgage rates are at an all-time low, making it the perfect time for you to buy or refinance to reduce your current mortgage payment. Fixed rates are the standard term for most lenders. As of now, the average rate for a 30-year fixed is 4.07%; a 15-year fixed-rate mortgage runs 3.06%.
  • Auto loans are the second-largest debt for most consumers, after mortgages ($750 billion nationwide late last year). Rates fluctuate from lender to lender, depending on whether the auto dealer alone assumes the risk of lending you the money. Online calculators also help you determine what kind of loan works best for you. The current average rate for a 48-month new car loan is 3.08%, with the longest available loan of 72 months at 4.16%. For a used car from 2005 to 2008, a 36-month loan averages 3.39%.
  • Federal government-backed Stafford student loans are fixed at 3.86% for undergraduate studies and 5.41% for graduate and professional students. Loans from private institutions, with variable interest rates, are traditionally costlier but currently start at 2.25%.
  • Credit cards maintained a consistent interest rate during the last few months, with the average rate about 13% to 15%. In addition, current offers include generous long-term introductory rates of up to 21 months that can save you hundreds of dollars in interest.

Tracking rates. The Wall Street Journal’s Market Data Center posts the prime rate for 30 financial institutions. Mortgages, auto loans and credit card rates adjust in step with this rate’s changes.

To track current rates for mortgages, auto loans and market funds, check your local newspaper; most publish a list at least weekly. An online source that may help you:  Forecasts.org, which projects future rates.

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Kimberly J. Howard, CFP, CRPC, ADPA, is a Certified Financial Planner and the owner of KJH Financial Services, a Fee-Only practice located in Needham, Mass. (781-413-4879). Please visit us at www.kjhfinancialservices.com or email Kim at kim@kjhfinancialservices.com.
 
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