Loans

One Way That Banks Use to Make More Money from Your Loan

EPF July 13, 2020

Lending is a profitable business. There are many ways that lenders use to make more money from your loan. Today we are going to discuss one unique way that not most of the people know.

It’s not only about banks. All banks, credit unions, lenders use this trick.

It’s refinancing. But not in a way that you think about it.

Let’s explain this with an example.

You apply for $50,000. You have high credit score. You have enough proven income, so you are sure that you will be approved.

Bank call you and explain that you are approved only for $40,000, or you can get $50,000 but with cosigner.

If you can find someone else to sign, then you should be ok. But if you don’t prefer this options for some reason, then this puts you in a situation that is not too good for you.

First of all, the amount offered is big enough.

But second, it is not what you wanted. This could put you in a complicated financial situation, because you don’t have the full amount.

Finally, you decide to get the loan, because you feel that these $40,000 are enough for now.

Next month, after you pay your first monthly, or in a few months, the lender call you again and tell you that you are approved for the higher amount.

You have paid one or few installments, we see that you are regular payer, your credit score is high enough, your income is high enough, and we would be interested to approve you for $50,000.

They actually know very well, that this was your desired amount.

You new loan will refinance the old one and you will receive about $10,000.

So, what is the trick that banks use?

The truth is that you will lose a lot in fees.

Before we explain you how this works, let’s explain how fees works.

Types of Loan Fees Based on The Way You Repay Them

  • One time fees

One time fees are all fees that comes with a loan that you pay one time. Origination fee is such. But it could be any other fee like preapproval fee and so on.

Example:

If you get a loan of $50,000 and your origination fee is $400, then you totally get $49,600.

  • Fees attached to your monthly payments

These are additional fees that you pay together with the loan. It could be insurance, or any other type of fee that is attached to your monthly payments.

Example:

Your principal and interest fee are $90 per month. But you actually pay $100. The difference of these $10 are some other fees.

Back on our example:

You get a loan of $40,000 and you pay $400 origination fee. Totally you receive $39,600.

Then in a month bank call you and offer you $50,000.

These $50,000 will refinance the old loan of $40,000, and you will get extra $10,000.

Ok, but the loan of $50,000 has another origination fee of $400. So you get $49,600.

Totally you would lose:

$400 + $400 = $800.

That is only in one time fees.

Will Lender Give Back All of Your Fees on The Old Loan, in Case You Refinance?

Not all.

  • One time fees.

You will lose all of them. The reason is because you have already paid them in your previous loan. In our case you will lose these $400 origination fee and all other fees that comes when you get the loan.

  • Fees attached to your monthly payments

You won’t lose these fees. Here is what will happen when you pay a loan in full or refinance it – it is same for any lender.

The lender will count the loan again and will deduct all extra fees from it on all remaining installments.

For example if you’ve paid 3 installments of $100. For each of them you pay $90, which is the principal amount + interest fees. This would means that your extra fees would be:

$10 * 3 = $30.

You will lose these fees.

What about the other fees, on the day that you refinance?

You won’t lose them.

If a loan is set on 100 installments, then these extra fees will be deducted on the remaining 97 installments.

But they will be added again on your next loan of $50,000

How to Avoid This?

  • Shop around

By applying with multiple lenders, you can find who will approve your desired amount. Even if this loan is not the cheapest, you still can consider it, if it works for you.

Say that you get approved for a loan of $50,000 with an interest fee of 10%.

Say that you also get approved for a loan of $40,000 with 10,1% interest fee.

Which of these you’d prefer?

One of them is more expensive, but the difference in interest fees is little. If 50,000 works better for you, then you should go that way.

  • Apply for a higher amount

If you want $50,000, you should try to apply for $55,000. Chances are the lender will approve you for these $55,000 or you will get approved for lower amount such as $50,000.

Here is one thing that you have to consider before you decide to do this little trick.

  • There are lenders who set the loan repayment plan on the approval date.
  • There are lenders who won’t set the loan repayment plan on the approval date.

How this actually affect you?

If you get approve for $55,000 and the loan has already been set, then it wouldn’t be possible to change it to $50,000.

In this case, if you want a lower amount, you should apply again. This means that you actually risk the amount that you have already been approved for. Although changes of denial are small, still there is a chance for a lender to make a wrong decision.

However, there are lenders that would agree to lend you everything that is under the amount for which you have been approved. For example, if you have been approved for $55,000, this would mean that you can get everything that is less than $55,000 without applying again.

  • Consider other credit products

Many lenders treat loans, credit card limits, and overdrafts differently. For example, if you have a loan of only $40,000, you also can apply for other products such as credit cards or overdrafts. These limits don’t affect the limit that is set on your loan. So, these extra products can help you fill the gap between these $40,000 and $50,000.

  • Build trust

If you go to your bank, your credit union or to a lender that already know you, your chances for a higher amount are higher. Always start your research from places where you already are client.

Is This Trick a Type of Manipulation?

Yes.

Waste $400 for this or that.

Vs…

Here is your loan of $50,000, you pay us only $400.

It’s obvious that these are different scenario.

When you get so much money and you pay only $400, you don’t actually care too much about that.

Because if we compare $400 to $50,000, the initial amount looks insufficient.

But in time, if you have no money in the pocket, you will see that they count in your life.

Conclusion

Always make smart and optimized financial decision in your live, even if you have a lot of money now. Loses of money could be visible other day.

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