When you take out a loan, you deal with three key numbers—principal, term, and interest rate. The principal is how much you're borrowing. The term is the length of time you have to pay back the loan. And the interest rate is a percentage of the loan amount that you pay to the lender.
You may also deal with upfront fees such as origination fees or loan processing fees. But the principal, term, and interest rate work together to determine your monthly payment. Before agreeing to an interest rate on a loan from a credit union, here are some questions you should ask.
1. How does this rate compare to rates at other banks?
Credit unions are known for charging slightly lower interest rates than traditional banks. These institutions are smaller than many traditional banks, and they are non-profit which helps keep their costs low.
However, these institutions still need to protect their bottom lines. Before signing any loan documents, see how your proposed rate compares to rates at other banks or credit unions.
2. How does the rate affect the monthly payment?
You can ask this question to your loan officer, or you can use an online loan calculator to work it out for yourself. The interest rate has different effects on the monthly payment depending on the loan principal.
If you're taking out a big loan like a mortgage, a percentage point difference in the interest rate can translate to a hundred dollars or more in the monthly payment. With smaller loans, the difference isn't as pronounced.
You need to understand how the interest rate affects the monthly payment so you can decide if you want to look for a loan with a lower rate.
3. Would the rate be lower if my credit score was higher?
Your credit score affects the rate, but how much? If your credit score prevents you from getting low-interest loans, you may want to stop, work on your score, and wait a while before you take out the loan. Your loan officer can give you an idea of how your credit score is affecting your situation.
4. Is the rate fixed?
Interest rates are fixed or adjustable. If it's fixed, you will pay the same monthly payment for the life of the loan. An adjustable-rate loan usually starts low and then it adjusts at some point in the future.
5. When and how will the rate change?
If you go for an adjustable-rate loan, you need to know when the rate is going to adjust and how. The adjustment may happen in a year or maybe not for five years. Typically, it adjusts to a popularly published interest rate plus a certain margin.
For more information about credit union rates, contact a credit union in your area.