What are the features of a loan that make it good or bad, safe, or dangerous? What are the most important criteria a borrower should consider?
  • Total cost, in dollars. You want this to be as small as possible.
  • ​Safe structure. The loan should be “structured to support repayment” (CFPB). This means it should be repayable in equal installments of principal and interest. No balloon payments (like payday and title loans), no minimum payments, like credit cards.
  • Affordable payments. The lender has tested your ability to repay, and the monthly payments fit within your budget.
  • ​Risk. What happens if you can’t pay or miss a payment? Have you given the lender access to your bank account through an ACH, or have you pledged as collateral something you desperately need?
  • Right of redress. Is the lender licensed and audited by the state? Can they lose their ability to operate if they are bad actors?
  • Term. This should always be as short as is affordable, certainly quicker than the useful life of any asset you may be purchased with the loan. Borrowing more money for more extended periods to secure a lower APR is never a good idea. For one thing, it increases your cost. Using a credit card, with minimum monthly payments, can lead to chronic indebtedness. Have an exit strategy: plan to get out of debt.
  • Does the lender report to the major credit bureaus? Will your performance on this loan help to build or rebuild your credit?
  • ​Is the loan predatory? Are the interests of the lender and borrower aligned, or can the lender profit even if the borrower fails?
  • TIP Rate (Total Interest Paid as a Percentage of Principal). TIP Rates track actual costs, and so they will be higher in more substantial loans, while APRs will be smaller.
  • APR. If and only if all other considerations are equal, including amount and term, it is appropriate to compare APRs.

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