Home Improvement Loans: What You Need To Know About Fees and Interest Rates
The question of loan fees comes up every day in the home improvement lending business and just about every ad that you find will say “No loan fees” or “free loan”. It’s a great talking point and it seems to make sense that no fees is better than some fees. And it’s true, assuming that the rates and other factors are the same for both loans. The problem is that the other factors that borrowers must consider when comparing loans are rarely, if ever, the same. If faced with a 15 year loan at 6.49% and no fees Vs. the exact same loan with a fee of $500, the decision is easy – go with the free loan. When loan factors vary, borrowers should look for the catch.
The catch comes with the fact that the lender or the broker needs to make money somehow and there are really only two ways: Charge the borrower something for the loan in the form of points (a % of the loan amount) AKA fees, OR increase the rate to collect a rebate from the bank or lender. In most cases, the free loan will have a rate significantly higher than the loan with the fee. That’s because when you finance a swimming pool or other home improvement, the amount that a lender or broker needs to increase the rate to make a profit is more than it is in the mortgage world. If a company wants to earn $500 on a $50k loan (one point or 1%) they may very well have to increase the RATE they charge by as much as 2%. That means the 6.49% loan from the loan originator just became an 8.49% loan to the customer – but at least it’s FREE, right?
Now let’s make the easy comparison. The 6.49% loan that you paid $500 to get has a payment of $435 per month. The 8.49% loan that you got for free has a payment of $492 per month. That means you save $57 per month and $684 per year by paying for the lower rate. You’ve essentially paid $500 to get a 2% rate break. The only way the free loan is in your best interest – no pun intended, is if you pay it off entirely in about 8 months. That’s how long it takes to save back the $500. If you hold that loan for 10 years, the $500 fee saves you $6,840. If you hold it the whole 15 years, you save $10,260. That’s an awful lot of savings for a $500 up-front cost. The bottom line is this: DON’T FALL FOR THE “NO FEES” SALES PITCH. There is a lot more to a loan than the cost. One way or another you’ll pay something for that loan. You either pay through a higher monthly payment or an up-front charge. Some of the most expensive loans you’ll ever see are “Free”.
For more information on swimming pool financing and finding the loan that’s best for you, contact Viking Capital at 904-686-1702 or visit www.poolloan.net.