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Loans with ‘Perks’ are NOT Always the Healthy Choice!

By admin ⋅ March 13, 2008 ⋅  Email this post ⋅  Print this post ⋅ Post a comment

Ever heard the saying, “if it sounds too good to be true it usually is” and “there’s no such thing as a free lunch”? Well that’s the point of this post, yes there are some good loan products out there that offer extra incentives but you must be cautious and do your research when it comes to these types of home loans, they sound like a fantastic offer that are hard to pass up…however let’s look a little more closely!

It’s a very Competitive Loan Market

Some lenders, mostly the lessor known smaller lenders sometimes try to entice customers by offering such incentives as free holidays, airpoints, or discounts on fuel. These offers sound great because who doesn’t want a free holiday by taking out a home loan?? However, most often these loan incentives come at the cost of higher interest or fees…or both! Caution must be exercised and all the fine print read!

all that glitters is not gold!

Let’s look at two examples

Ok let’s take for example a loan amount of $300k and take two different interest rates at 8.2% and 8.5% over a 30 year term. The 8.5% rate also offers enough airpoints for a free holiday to the Pacific Islands. OK so a trip to the Islands sounds great!! But let’s look at the at big picture here.

$300k at 8.5% over 30 years, P & I,this will cost you $530k total
$300k at 8.2% over 30 years, P & I, this will cost you $507k total

Now, how is that trip to the islands looking??? Do you think it’s really worth $23k??? This is an easy, obvious example, and yes it’s over the long term of 30 years but it illustrates one of the traps out there!!

When it comes to a Loan Product, let’s keep it simple!

I like to keep everything as simple as possible, whether it comes to health & fitness, or mortgages. Try to consider rate and features and forget about the freebies and extras that sound too good to be true! The comparison rate which Lenders now must disclose to the public is a great way to start. The comparison rate shows the total cost of the loan which includes ongoing fees, interest costs, and up-front charges over the life of a loan. What’s funny is that a cheaper interest rate product will often have a higher comparison rate which means it may not be so cheap after all!!

Start with interest rate, then look at the comparison rate, then loan features (I will talk about this further in another post). Consult your broker (me!!) if you have questions on a loan product before committing!!