UPDATED November 16th, 2017
There comes a time when you’re going to take out a loan. It could be a student loan, car loan, home or home improvement loan. Whichever type you take out, it’s important that you know these three little words that can save you money on your loan deal: Principle, Interest, and Length (P.I.L.).
Taking a loan is a huge deal, no matter the dollar amount. It’s important that we make sure to compare the same loan deal from at least three different financial institutions to make sure that we’re making the best choice. We’re not begging for credit here. If one financial institution will give us a loan, there are several others that will as well. You get to choose which company will loan you money, just as the company gets to choose to whom it will loan money. We’re on equal footing, and we have to make the best decision possible. To make sure that we’re comparing apples to apples instead of apples to oranges, make sure you know the P.I.L. of every deal.
Read Related: 10 Factors That Affect Your Mortgage Rate
Principle is the amount of money that the item you want to buy actually costs. It seems silly, but the more expensive the item is the less people seem to know about how much it actually costs. I can’t tell you know many times I’ve asked someone how much the principle on their car loan is only to receive a blank stare. Be choosy and compare prices of similar items from different sellers.
Interest is the amount you’ll have to pay back on top of the principle. It’s the money you’ll pay to the institution that lends you the money. It is really important to compare the interest rates offered from different financial institutions. The offer that financial institutions make to you is based, partly, on your credit scores but that doesn’t mean that all financial institutions will offer you the same deal. Saving a percentage point, or two, could end up saving you thousands of dollars over the lifetime of your loan.
Length of loan is the amount of time you’ll be required to make payments on the loan. This is a crucial piece of information. Paying $150 per month for 36 months is very different from paying $150 per month for 84 months. Don’t let the term “months” confuse you. Why do you think financial institutions prefer to use months? For most large purchases, we’re talking about years here, so do yourself and your pocketbook a favor and do the math.
Making sure that every time you take out a loan you’re aware of the principle, interest rate, and length of the loan before you sign the loan papers is a simple way to save yourself thousands of dollars.