Bank Loans: 3 Things to Remember

Banks have always had a way of intimidating people. From their large, lavishly-appointed buildings and offices, to their suit-and-tie management, to their imposing application forms, banks have perpetuated a daunting presence with which to do business. And truth be told, they probably prefer it that way. It’s a very effective business tool for them. They have the money and the power to say yes or no. They have what you need and they know it, right?

Well, it’s time that you realized that banks are just like any other business. They sell goods and/or services. And if their customers don’t buy them, they’ll go out of business. What do banks sell? Two things: accounts and money. Those checking, savings and Certificate of Deposit accounts are all designed, in one way or another, to make money for the bank – mainly in fees. Our focus in this article, however, is the second major way in which banks make money, by selling, or lending, money. Here are three things that you should keep in mind the next time you consider borrowing money from your friendly neighborhood financial institution (though they would probably be just as pleased if you forgot them):

  • The bank needs to lend money more than you need to borrow it. Of course they want you to think that they’re doing you a big favor by loaning you the funds you need. Perhaps they are, but not as big as the favor that you’re doing them. Banks must lend money in order to remain in business. Without making loans, they would go bankrupt. Also, each branch is like a mini-business within a business, with its own budget, projections, and profit goals. There are thousands of banks, including the internet, that you can potentially borrow from. Keep that in mind the next time you feel intimidated about applying for a loan. Also remember this: the loan officer is really just a salesman. The product that he or she sells is money. Take the car salesman, real estate agent or shoe salesman; if no sale is made, no commission is earned. If you don’t take the loan, the loan officer makes no commission.
  • Loans of the same type can differ dramatically, not just in interest rate, but in terms, fees, penalties and numerous other things. One very common misconception is that two loans with the same interest rate and length of payment period will cost the same. This is not necessarily the case. Cost can vary depending on the type of loan and how the interest is calculated. For instance, on a simple interest loan, interest is paid only on the loan balance that’s outstanding. So if you pay off the loan early, you’ve only paid interest on the amount that you borrowed, not the balance that you paid off. In contrast, most installment loans are front-end loaded, which means you pay interest on the original loan amount throughout the life of the loan. This makes the dollar amount that you pay in interest significantly higher than that of a simple interest loan. Also, paying off this type of loan early has no benefit, because you’d still owe the same amount in interest.
  • Loan rates and fees are negotiable. Of course they don’t necessarily want you to know that. Most banks offer set rates and fees for each type of loan that they make. But they won’t tell you that the more attractive you are as a customer, the more negotiable those rates and fees can be. Therefore, before you apply for a loan, get a copy of your credit report. Then shop around; get quotes from numerous banks on the loan you’re interested in. Once you’ve narrowed your choices to the best two or three offers, ask those banks if they can beat each other’s deals. Banks are very competitive. If your credit report is clean, use that as a negotiating point. If you’re a regular customer, mention that to them. Offer to have the payments debited directly from your checking account. There are a number of ways that you can negotiate a better deal, which all translates into saving yourself money.

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