The Hidden Costs of Loans

With fees and credit score considerations, taking a loan costs much more than only the amount borrowed. 

Taking out a loan always comes at a cost. That’s expected, unless you take on an interest-free loan from a friend or family member. But it's easy to miss just how costly loans can be, especially if you take out a loan in a hurry. 

" Unfortunately, there are lots of hidden costs in any loan, ” says Paul Kuzmickas, a Cleveland bankruptcy attorney. “I come across people all the time who think they are taking a loan out for X when in reality, it is X plus 50 other small charges hidden in the loan. " 

Some hidden costs are unethical and predatory, many are standard expenses for a particular industry and others are peripheral to the loan. Here's a blueprint of what type of hidden costs you should be looking for. 

The cost of a low credit score. " No matter what type of loan you are seeking, know your credit score. Lower credit scores tend to come with a higher interest rate, " warns Carla Blair-Gamblian, a home loan consultant with Veterans United Home Loans. 

True, there's not much you can do about your credit score if you need a car and a loan now, but if you're considering taking out a loan and have time to improve your credit score, you should give it the old college try. 

Given that everyone's financial picture is different and the way credit bureaus formulate credit scores is shrouded in secrecy, just how much you'll save is impossible to say. Still, as Blair-Gamblian says, " The higher the score, the more likely you are to get the most favorable interest rate, and one compounded over 30 years on a mortgage can add up to tens of thousands of dollars of savings. " 

Total cost of ownership. This is one of those peripheral hidden costs. You may be taking out a home loan of $150, 000 or a car loan of $15, 000, but there are property taxes to consider for the home, sales tax for the car and insurance for both, which will drive up the total cost. With a home, there are even more costs to consider, including furniture and lawn care. And while your water bill and garbage collection was probably paid for at an apartment, you'll be footing the cost in your new home. 

You intuitively know all of this, but it's still easy to forget when you get wrapped up in the excitement of buying a house, car or, say, a boat – which will have you shelling out money for docking fees and an assortment of other costs in addition to the monthly payments. So if you budget for a loan that feels as if it's right at your financial limit and you don't consider the total cost of ownership, you could find yourself stuck with a loan you can't get out of – and a purchase you can't afford to keep. 

Fees. Almost every loan has some fee attached to it. Student loans, for instance, have a disbursement fee, an insurance fee, an origination fee and a repayment fee. If a student is experiencing a rough financial patch and applies for forbearance – like a six- or 12-month holiday from paying the monthly loans – he or she will pay a deferment fee. 

And if you do defer your loan, you’ll pay interest along with the fee, says Mark Kantrowitz, senior vice president of edvisors. com, a network of sites offering educational resources for students and parents. 

" Students who get temporary suspensions of the obligation to repay a debt are often surprised by the increase in the loan balance at the end of the forbearance period. Forbearances are not a good long-term solution to problems repaying debt because they often dig the borrower into a deeper hole, " Kantrowitz says. " It's better to be in a repayment plan or partial forbearance where the borrower is paying at least the new interest that accrues. " 

A helpful reminder with fees : " The more complicated a loan, the easier it is for consumers to get tripped up by fees, " says Michael Poulos, president and CEO of Michigan First Credit Union in Detroit. 

Poulos says credit card fees can be particularly complicated. " You have a very complex, multipart loan that changes every month, " he says. " Make sure you read the fine print every time before you apply for a card. Some of these fees come from literally doing nothing. Inactivity fees, while they may be highlighted clearly, are often not on consumers' minds as they sign up. " 

Even when the hidden costs aren't hidden, they can still get you. That's an observation from Chris Nichols, chief strategy officer of CenterState Bank, headquartered in Winter Haven, Fla. 

" These days, particularly after the Dodd-Frank Act, there are little in the way of 'hidden' fees or costs for consumer loans. If anything, the multiple disclosures often overwhelm the consumer to the point of them tuning out some of the details, thus hurting the Truth in Lending Act's intent, " Nichols says. 

That’s why it's important to study every angle of a loan before you get too deep into the process, particularly if it's for an expensive purchase. 

But you're only human. If you're closing in on your dream house or you're about to sign paperwork allowing you to buy that perfect car, you've invested a lot of time and emotion. At this point, your lending officer could wear a T-shirt emblazoned with all of the hidden costs that come with your loan. You aren't going to back out now.