The devil is always in the details, and nowhere is this more evident than when looking at the pesky fine print on credit card applications and loan agreements. The U.S. government has even legislated these evil little notes when they passed the Truth in Lending Act (TILA) legislation requiring entities issuing credit to consumers to disclose certain facts prior to completing the transaction. Disclosure provides the information, but knowing what to do with that information is what helps you make wise financial decisions. Read on to uncover the hidden fees, terms and rules that could break your piggy bank.
Loan agreements are packed with pages of tiny print and mind-numbing details. Five items to look for in a loan agreement include:
- Finance Charge
This number quantifies the cost of credit. In addition to providing (in dollars and cents) the amount of interest you will pay over the life of your loan, the finance charge section will also include any associated charges required in order to receive the loan (such as document preparation fees).
- Annual Percentage Rate (APR)
Annual percentage rate (APR) is the interest rate that you pay to a creditor on a yearly basis. This number factors in all expenses, including the interest on the loan, origination fees, discount points, etc. It's the reason a loan advertised at an 8.0% interest rate often results in a loan payment based on an 8.5% interest rate. APR is the amount to use when comparing loans from different potential lenders.
- Amount Financed
The amount financed is the actual dollar amount that you borrow. It is often less than the amount requested on your loan application because prepaid finance charges are deducted from it. Prepaid finance charges are paid at the time the loan closes. For example, if you apply to borrow $50,000, and must pay $2,000 in prepaid finance charges, the amount financed is actually $48,000. So, what does this really mean? It means the lender got paid the $2,000 up front, rather than through the loan.
- Schedule Of Payments
The payment schedule shows you the number of payments, the amount required for each payment and when they are due. The schedule may also show the amount of principal, interest and insurance (if any) that is covered by each payment (such as for mortgages). Furthermore, the first few payments that you make will be primarily weighted toward interest, with only a small portion dedicated to principal. The last few payments you make will be primarily weighted toward principal.
- Total Payments
This is the total amount you'll pay if you make all the scheduled payments on your loan. In many cases, the total payments can amount to more than double the amount originally borrowed, if extra debt repayments are not made.
Like loan issuers, credit card issuers are also required to disclose certain facts to borrowers. Most credit card applicants breeze over the disclosures when they sign up for the card, only to realize - after it's too late - how much the card is costing them. Details worth noting when you apply for a new credit card include:
- Annual Percentage Rate (APR)
In addition to the APR on the balance of any amount borrowed, credit card issuers must also disclose the APR on balance transfers, cash advances and defaults (all of which tend to be higher than the APR for purchases). Other common APRs include tiered APRs, which charge higher interest rates on balances above a certain amount; and introductory APRs, which are raised after a certain amount of time has passed. Both of these items should be reviewed carefully. It's also important to know if the APR is fixed or variable. If it is variable, you will want to know how often it can change and by how much.
- Grace Period
This is the amount of time, from the listed date on the statement, that you have to pay your bill in full if you want to avoid finance charges. Twenty-five days is a fairly common time frame, but some cards offer less time. Paying your balance on time and in full each month is the best way to avoid finance charges.
- Method of Computing Balance for Purchases
Credit card companies use a variety of methods for calculating balances. Some base their numbers on the average daily balance, others on the account's previous balance. Calculations may be done over one billing cycle or over two billing cycles. New purchases may be included or excluded from the calculations. Calculations based on a single billing cycle and the average daily balance generally result in lower finance charges.
Minimum Finance Charge
This refers to the finance charge that must be paid in the event your finance charge is lower than the specified amount. For example, if your finance charge comes out to $0.75 this month and the minimum finance charge for your card is $2, you will need to pay $2. If you pay off your balance in full each month, the minimum finance charge will not be levied.
- Annual Fee
If the credit card issuer is charging you an annual fee for the privilege of using the card, you should know the amount of the fee and whether it is levied on a monthly or yearly basis.
- Other Fees
This category includes transaction fees for balance transfers, cash advances and for instances when you've exceeded your spending limit. Returned-check fees, late-payment fees and other miscellaneous expenses also fall into this category.
Loans and credit are common components of modern life. They are tools that can either be used to help you achieve your goals or to help you dig a financial pit from which bankruptcy may be the only escape. Understanding how these tools work will help you learn how to use them properly. Reading the directions is a great place to start your education.