Q&A: Answering Questions About Loans

Curious to learn more about the ins and outs of borrowing money? Read on for an FAQ about interest rates, credit scores, monthly payments and more must-knows when it comes to taking out a loan.

Are interest rates and APR (Annual Percentage Rate) the same thing?

Your interest rate is how much it costs to borrow money from a lender. An APR includes your interest rate, as well as additional fees. All lenders are required to structure their APRs in the same way; so in effect, an APR makes it more difficult for lenders to sell you a “great rate” and then sneak in hidden charges.

When in doubt, ask your lender about the APR on your loan and use this figure to compare which loan or credit card offer is best.

How do lenders decide who qualifies?

Lenders want to see a good credit score, manageable debt, and proof of steady income. While you may still qualify for a loan or credit card without these, your interest rate may be higher – which means more money spent in the long run.

How can I find out my credit score?

Your credit card issuer and/or financial institution may display your credit score in a prominent location on monthly statements or when you log in to your account online. Another option is to request a free copy of your credit report from the top three credit bureaus at www.annualcreditreport.com. Although your credit score will not be provided for free at AnnualCreditREport.com, knowing what is on your credit report can help you improve your credit score. Watch our recent credit webinar (link to YouTube) to learn more about your credit score and reports.

Will borrowing a loan affect my credit score? 

As long as you make payments on time, a loan can improve your credit score. Moreover, when using a personal loan to consolidate other debt, you may improve your credit utilization ratio which impacts your overall credit score. If payments are missed on any kind of loan, mortgage or credit card, your credit score will be negatively affected. However, the initial loan application may impact your score negatively and could impact your credit utilization. As HUECU members, you have access to free credit counselors (link to GreenPath) that can help you determine what impact a loan may have on your credit.

What’s my monthly loan payment? Will this change?

Your lender will help you work out a manageable monthly payment, based on your interest rate and the term of your loan. Choose a longer repayment timeline for smaller monthly payments, or a shorter timeline to reduce total interest by paying off the loan sooner.

In most cases, monthly payments won’t change. The reasons for a change would be:

• You’ve completed the fixed period of an adjustable-rate loan, and your interest rate is now variable depending on the current index
• You have an interest-only loan and you’ve reached the end of the interest-only period, leading to a new payment structure as you begin to pay off the loan’s principal
• Your lender has changed fees or possibly made a mistake – don’t be afraid to get in touch and ask about an unanticipated change to your monthly payment!

What if I can’t make a payment?

Speak with your lender as soon as possible. Explain the situation and discuss options. It may be possible to delay a payment due date for a limited time, or to refinance your current loan for one that offers more manageable repayment terms that better match your current financial situation.

Can I take out two loans at the same time?

There is no limit to how many loans you can take out at the same time. Indeed, many people may use a credit card while paying off a mortgage, and still take out a personal or student loan. A key consideration is that holding multiple loans may affect your debt-to-income ratio, which could make it more difficult to qualify for a loan with favorable terms and a low interest rate. Additionally, having too many loan payments may decrease your monthly cash flow and impact your lifestyle.

What’s an origination fee?

A common fee when taking out a loan is the origination fee, which covers the lender’s cost of processing a new loan application. The origination fee will be added to your total loan balance, so that your monthly payments cover not only the money borrowed, but also the origination fee. 

What’s the difference between a secured and unsecured loan?

A secured loan is protected by an asset, like a house or a car. If for some reason you can’t make monthly payments or default on the loan, your lender can repossess that asset to cover their financial loss. An unsecured loan – such as a credit card, student loan or personal loan – isn’t tied to an asset. Therefore, interest rates on unsecured loan types tend to be higher.

What if I don’t understand the fine print?

Lenders work with a number of industry-specific terms and complicated calculations. If there’s something you don’t understand – ask! The right lender will be happy to explain and simplify everything, to ensure you understand exactly what to expect from the process of taking out a loan.

Below, hear directly from HUECU CFO, Katie Armstrong and Branch Manager, Carline Olivier-Guerrier, about understanding banking fine print and loan terms.