You may not be able to avoid hidden loan costs if you don’t read the fine print
By: Phoenix Lee/
Let’s face it: getting approved for a business loan is exciting. But in your excitement, don’t forget to read the fine print.
Many lenders have hidden loan costs, including annual fees, bank charges, closing costs, commissions, and balloon payments. So stay focused and clear-minded during the loan process.
Here are some tips on avoiding hidden loan costs that can save you hundreds, if not thousands of dollars, over the life of your loan.
1. Do your homework. You’ve probably spent substantial time researching the viability of your business concept; likewise, employ the same careful consideration when looking for a loan. Consult with an independent loan specialists to check for complaints against a particular lender, and ask for recommendations and referrals to reputable lenders from family, friends and colleagues.
2. Ask lots of questions. Borrowing money for your business is a serious decision. Ask as many questions as you need to, to feel comfortable with the loan terms and conditions. Make sure you understand your annual percentage rate, the amount of your monthly payments, and how long you will pay them.
3. Have a lawyer or other expert review your loan documents. This is especially important if you are inexperienced in the loan process. If a lender attempts to talk you out of having someone look over the documents, proceed with extreme caution.
4. Take your time if you want to avoid hidden loan costs. Don’t rush into a loan agreement with the first lender who approves you. Shop around and compare interest rates and costs, just as you would with any other important shopping decision.
5. Read every word in the loan agreement before you sign. During the loan process, consider every piece of paper you sign as a binding contract. Never sign anything that you haven’t read in its entirety and do not, under any circumstances, sign a blank document or a document with empty lines that could be filled in later.
6. Avoid loans with balloon payments. While they may seem reasonable now, loans with balloon payments may come back to haunt you later. Balloon payments may be acceptable in very limited circumstances, but they are usually bad news for small businesses.
7. To avoid hidden loan costs, always choose a loan with positive amortization. If you choose a non-amortizing loan, you will find your loan balance getting bigger each month instead of smaller.
8. Beware of high prepayment penalties. If all goes according to plan, your business will soon be flourishing, and you may have the funds to pay down your loan more quickly. But if your loan agreement contains a prepayment penalty clause, you may end up paying significantly more than the original loan amount. Some lenders will include prepayment penalties to prevent you from refinancing a high-interest loan.
9. Know your complete financial picture and credit score. Before you fill out a loan application, gather your personal financial statements and credit reports from credit reporting agencies. Once you have a solid understanding of your credit risk, you stand a better chance of getting the best interest rate and not becoming prey to abusive lenders who may try to steer you toward a higher-cost loan.
10. Refinance with care. Before you refinance to a lower interest rate, find out exactly what fees and other charges will be assessed. Some unscrupulous lenders offer deceptively low initial rates and hit you with big fees after you sign the loan agreement.
Financial institutions will carefully assess the risk of dealing with you before suggesting refinancing solutions. Before you venture out and choose your lender for refinancing solutions, be sure you clearly understand their expectations.
Any financial institution will want to verify that your company is well managed. Being profitable is one thing, but ensuring that you have the team in place to sustain growth is another. Start by demonstrating that your team members are competent and well-qualified to do the job. Before seeking business refinancing solutions, it would help to prove your successful track record by communicating past achievements and the soundness of your plans.
Before applying for refinancing solutions, you will need to gather key information and required business documents to support your application. The requirements will vary greatly depending on the type and amount of credit, from basic information for a credit card to full financials for a major term loan.
It is important for the business owners to have a clear understanding of their financial situation and objectives – keeping them in mind in order to acquire the best refinancing loan for them. Business owners with good credit can get special deals on their closing costs from various lenders. In these cases, getting the best refinancing loan may make sense as it helps them to achieve lower interest rates.
Achieving better credit scores is another great reason to get the best refinancing loan. If business owner’s credit score has gotten better because mortgage payments have been made on time, the owner may be able to take advantage of that improved credit by refinancing into a loan with lower interest rates decreased payments.
If the owner has paid off a car, inherited a sum of money, or received a bonus at work, if the owner is planning to own their home into retirement, refinancing down from a 25-year loan to a 20 or a 15 year loan may be a good move financially. The payments will rise, but the extra money can be used to cover the difference.