Borrowers frequently ask what is the interest rate? However, they disregard a more critical question. what will the total cost of my borrowing be? There are several hidden costs of a business loan that should be accounted for. Surprisingly, many people are not informed of these fees.
Borrowers resort to a basic formula to calculate their interest rate:
principle x rate x time = interest ( + numbers of days borrowed divided by the number of days in a year.)
Lenders are well aware of this, and as a result borrowers are unknowingly taken advantage of. It’s important that you understand the true cost of a loan, including the interest rate and additional fees. Here is a list of hidden fees you may not might be conscious of when taking a business loan:
Performing a credit check, an appraisal of assets, signing a pre-packaged loan agreement or reviewing your financial position. Anything that is related to time, legal, and disbursements, fall under the due diligence category. Therefore, before you give permission to performing due diligence, be aware of who is covering these fees and how much they will be.
A fixed monthly fee is often added to cover the administering of the loan. Regardless, if there is no outstanding loan that month, the fee will still be implemented. For example, an annual review or renewal fee can be charged as well.
A lower headline interest rate will be paid on a loan with a longer term. However, if there are bulky pre-payments, termination fees, or your loan is outstanding for a longer period of time, the fee will be higher.
How is does your lender issue the loan? Is it a direct deposit, cheque, or an e-transfer? Lenders often take a transaction fee, depending on the method the money is advanced with.
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Minimum Increments
A set increment of the loan disbursement is often rounded up by lenders. Miminums can not be negotiated, therefore you should arrange the lowest minimum amount that is possible.
To receive the advertised interest rate, a set amount is required from borrowers per month. You can get penalized if you drop below the set amount through the course of the month.
This is referred to as a yearly “true up”. The annual interest rate to be collected is calculated. If the amount earned by the end of the year was lower than forecasted, the borrower still needs to pay the expected amount.
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