Pop quiz. What is the cheapest loan out of these two –
- Interest rate 5%
- Interest rate 5.5%
Sounds simple doesn’t it. The interest rate is cheaper so that must be the best loan option. That said, you probably realised the obvious answer was wrong and went for the more expensive option, but was it just a guess?
Cost of Borrowing is More Than Interest
Most lenders will tell you the interest cost and tell you the fee they will charge. But there are several other questions you need to get answers to. The issue here is that there a number of other costs, both at the outset and ongoing that could come back to haunt you.
We are not saying that you are getting mislead, absolutely not. Just that it is easy to misunderstand what the costs are.
What Should I Consider When Looking At Loans?
- Am I planning to overpay or repay early
- Am I willing to put up more security
- Just how good are my business financial accounts
This is about future thinking. What you are planning, what you want to be able to do and what other plans you may have.
What Costs Of Borrowing Should I Consider?
- Is the interest rate fixed, linked to base rate, or linked to LIBOR
- Is there an early repayment penalty
- Is the interest rate only for a specified period, if so what does it go up to afterwards
- Are there security costs
- Are there legal costs
- Is there a valuation required
- Do I have to pay the lenders legal fees
- Do I have to use the lenders solicitors
- Do I think base rate of interest will go up whilst I have borrowed
We suggest you ask these questions when considering the cost of borrowing. There are no right of wrong answers to the above, it really is a case that every lender differs.
All we suggest is that you ask the questions, at least you will then know exactly where you stand.
The Cheaper Cost of Borrowing
So, back to the beginning. If your lower interest rate was linked to LIBOR and you had to pay your lender’s legal fees, costs, security fees and valuation. Compared to a higher interest rate but with no other costs, then you start to see the difference.
The easy answer is to let us manage the whole process for you, and find you the deal that best suits you.
But, if you want to go it alone then make sure you get all the information so you can properly budget for the cost of borrowing. There are plenty of good ideas here.
By David Farmer
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