A loan can open the doors to opportunity. Higher education, a business expansion, and home ownership can all be achieved with the financial boost provided by the right loan. But not all loans are created equal, and in this article we will explore the different types of loans, what to watch out for, and highlight some of the best loans out there for Latinos.
Before we get started, it is important to cover some basic vocabulary which you will encounter as you begin your search for the right loan.
The Lender is the person who is lending money to a borrower. In exchange for lending money, the lender receives payment in the form of interest. Banks, credit unions, and the federal government are all common lenders.
The Borrower is the person who receives the loan from the lender. The borrower could be an individual, a business or even the government. If Wells Fargo provides a home loan to a family, Wells Fargo is the lender and the family is the borrower.
Principal is the amount of money received by the borrow from the lender. This could be $250,000 for a house, $25,000 for a car, or maybe $100 from a friend or family member.
Interest is expressed as a percentage, and shows how much compensation the lender receives for making the loan. Most interest is expressed as an annual percentage and paid monthly. However, some loans do have monthly, quarterly or even daily interest requirements. As always, it is critical to read the fine print so you know exactly how your interest payments function and what your obligations are.
Fixed Rate Loan On a fixed rate loan, the interest rate quoted per year, month, quarter or day will remain unchanged for the life of the loan. If you get a 30-year home loan with a fixed rate of 5%, you will be paying 5% annual interest today and 5% annual interest in 25 years. The rate is fixed and will not change.
Variable Rate Loan On a variable rate loan, the interest rate charged is “floating” and dependent on the overall interest rate environment. If interest rates within the economy move higher, so will your interest payments. If interest rates within the economy move lower, your interest payments will, in turn, move lower. It is important for consumers to note that interest rates today are historically low - so there is little opportunity for rates to move much lower. In general, fixed rate loans are preferable as you know exactly how much will be owed each month for the life of the loan.
Types of Loans
There are five major types of loans which Latinos should be aware of. Which type of loan is right for you will depend on how you will be spending the money.
- college loans
- home loans
- auto loans
- small business loans
- personal loans
Let’s explore each one of these loan types in a little bit more detail.
College can be extremely expensive. It can also be a great way to learn new skills and raise your income potential for the remainder of your life. In 2016, the average cost of attending a private university in the United States per year was a whopping $33,480. Even for in-state residents attending public universities the average cost was $9,650.1 For this reason, many college students use financial aid to help make their dreams possible.
Before we discuss the loans that are available, it’s important to note that there are a huge amount of scholarship and grant opportunities for Latinos going to college. The Hispanic College Fund and the Association of Latino Professionals in Finance and Accounting all distribute hundreds of thousands of dollars to Latino students each year. Additionally, if you are the first member of your family to attend college, you may be eligible for the Sallie Mae Fund First in My Family program.
For Latinos looking for student aid outside of scholarships or grants, a great starting point is the U.S. Federal Government. The U.S. Department of Education operates the Federal Student Aid program, which provides a number of lending opportunities to choose from. In general, these federal loans will carry lower interest rates than can be found at commercial institutions (like Wells Fargo or Bank of America). For loans processed before July 1st, 2017, the interest rate is just 3.76%. 2 As always - it is important to shop around and find the best rate possible.
When getting federal funding, there are generally two types of student loans: subsidized and unsubsidized loans. Subsidized loans are specifically designed for students who will receive little (or no) support from family and will not be receiving any significant scholarships or grants. Just because you feel you can’t afford college doesn’t mean you shouldn’t apply - the loans available through this subsidized loan program may surprise you.
Like going to college, buying a home can be expensive. It’s for this reason many families get a home loan to make the dream of owning a home possible.
A big mistake made by many first-time buyers is to find a home they would like, and then figure out if they can afford it. By doing the math on the front end, you can determine how much home you can afford before you begin your search. How can you figure this out? Consider the commonly used “Rule of 36%”. This rule states that your monthly mortgage, plus any other outstanding debt payments, should not exceed 36% of your monthly income. Below are two examples:
A family who is debt free and earning $5,000 per month $5,000 x 36% = a $1,800 mortgage payment is manageable
A family making $300 monthly student loan payments and earning $5,000 per month $5,000 x 36% - $300 = a $1,500 mortgage payment is manageable
Once you know how much you can afford each month, begin speaking with lenders who specialize in home loans. Your credit score can have major implications for how much you can borrow, and how much interest is charged. If you aren’t familiar with how credit scores work, read our article here first.
Like college loans, the federal government can provide some assistance for homebuyers who may not qualify for loans directly through a financial institution. The FHA program provides loans which carry built-in mortgage insurance. This insurance makes it possible for lenders to offer competitive rates to home buyers that may not otherwise qualify due to their income or credit score.
For Latinos looking for an online loan experience, take a look at Rocket Mortgage or GuaranteedRate. If a face-to-face experience is important it can be good to stop by Bank of America, Wells Fargo, or a local credit union. If you have poor credit, or no credit, and do not qualify for an FHA loan - consider checking out Caliber Home Loans or Carrington Mortgage Services. As with any major financial decision, take the time to understand the terms of the loan and to read the fine print.
Like a home, many Latinos use auto loans to make the purchase of a vehicle possible. In general, auto loans are issued in one of two ways: directly through the dealership or through a private bank or credit union. Each of these avenues comes with pros and cons which should be considered.
1. Auto loans directly through the dealership
Pros: Working with a dealership can be simple, as the dealer will provide all of the paperwork and assist in issuing the loan. Dealerships are also many times more flexible in offering financing, because they want to see you buy the vehicle.
Cons: Because they want to see you buy the vehicle, they have been known to offer “introductory” rates who throw in “gimmicks” to make the loan appear attractive at face value. Don’t skip the fine print, especially when receiving dealer-financing.
2. Auto loans from a bank or credit union
Pros: Banks are more conservative in how they lend money, meaning that if you are issued a loan by a bank it means they are confident in your ability to make your monthly payments. If a bank declines your auto loan, it may signify that you are interested in vehicles which our outside of your price range.
Cons: Working with a bank can add some complexity to the process, as you will need to be approved at the bank and then work with the dealership on the actual purchase of the vehicle.
With the purchase of an auto loan, it is critical to shop around and find the best rate. More so than with home or college loans, the terms and interest rates charged can vary significantly from one auto lender to the next. On top of this, the auto loan industry has developed a reputation of acting in a less-than consumer friendly manner over the years. As a result, it is important to take your time and be prudent when finding an auto loan.
Small Business Loans
Starting a new business is an exciting time. It can also be a time when you need more cash on hand than what your developing business can provide. Small business loans can help with startup costs, investments in machinery, or to help bridge the gap during tight times. Like college loans, there are many organizations which specialize in supporting Latino business owners. Groups like the Latino Credit Union, Minority Business Development Agency, and the Latino Coalition all provide small business loans and support which are specifically tailored for Latino business owners.
Regardless of where your loan comes from, expect to pay higher interest rates than when borrowing money for college or a home. Small business loans are inherently more risky for the lender, as the repayment of the loan is dependent on the financial health of the business. How much revenue will a new piece of machinery provide? How well positioned is the business within the industry? Is the business profitable, or struggling to make ends meet. These are all questions which you should be prepared to answer during the small business loan process.
Lastly, we’d like to cover personal loans. Unlike a home loan, college loan, or auto loan - personal loans are made to individuals and are not designed for any specific purpose. Have a vacation coming up and can’t afford it? Need help fixing a vehicle? A personal loan may be the right fit.
These loans tend to have the highest interest rates, as they are no physical assets backing the loan. If you can’t afford to pay your mortgage, the bank can take your home. If you can’t afford your personal loan, the bank has fewer options. It’s always advisable to get a personal loan from a reputable lender. Like the auto loan industry, firms which specialize in providing personal loans (like check cashing or cash advance businesses) have a less-than golden track record.
With any loan, it is critical to understand the terms of the loan agreement and work with a lender you are comfortable with. At the end of the day, your gut feeling on a lender, banker, or credit union will tell you a lot about the institution. Ask questions, and make them earn your trust and business. Here at Super Monedero, we will be with you every step of the way.