The Total Cost of Borrowing Money

Borrowing money or taking out that loan may cost more than you think.
When people borrow money or take out a loan, whether it be a personal loan, student loan, or car loan they often overlook the total cost of borrowing money.

Most of the time we only consider interest in terms of the cost of borrowing money. With a loan you might take out 10,000 dollars and pay interest on the loan at an annual rate of 12%.

What we often fail to consider when borrowing money is the other costs associated with loans.

Various fees.

Not all loans come with fees, but many can come with multiple fees. You could be charged a disbursement fee just for having the loan check issued. You might be assessed a repayment fee when your loan goes into repayment.

Fees might be charged when you make payments on the loan, such as being charged to pay the balance down via phone or online.

Transaction fees could be charged when you transfer a balance or apply for a new loan. In fact you might even get charged an application fee, service fee, or processing fee just for applying for a loan.

Penalty fees and charges.

Besides fees charged just for taking money out, there are also well known penalties for not paying your monthly loan payment on time. You could also be penalized for not paying the loan down quick enough or missing payments.

If you pay your loan back through check or debit and you don’t have enough cash in your bank account when the payment goes through you could be slapped with bounced check fees by both the bank and the loan issuer as well as overdraft fees by the bank.

Credit scores.

Your credit score goes up and down based on a number of factors. These factors revolve around how much debt you have, how you are paying it back, and what kind of debt.

Every time you apply for a loan to borrow money your credit history is pulled. This can lower your score by a few points. Taking on too much debt can also lower your score if it seems like you are using too much borrowed money.

A low credit score can result in higher interest rates on future loans or even on your current loans.

The total cost of borrowing money goes beyond just simple interest rates. If you borrow money from family or friends you’ll be putting yourself at risk for tension between you and others which goes well beyond the simple dollar and cents cost associated with loans.

Carefully consider your situation before applying for a loan or borrowing money. Make sure you can pay it back, read the fine print, and be careful when borrowing money from relatives or friends.