How To Compare Different Types Of Loans
August 6, 2021
If you’re considering securing a loan, you should always make sure you are getting the best deal possible from whichever lender you finally choose. Obviously, there are no free rides when it comes to borrowing money, but the lower the overall cost of a loan, the quicker it will be to get out of debt. That said, finding the right loan isn’t always as simple as it seems because there’s a lot to think about when deciding which lender to borrow from. To help insure you choose the right loan for your particular needs, follow the below tips when comparing loan offers.
Get Several Quotes
All kinds of lenders offer loans including online-only lenders, banks, and credit unions. There can be major differences from one lender to another when it comes to interest rates, repayment guidelines, fees, and how long it takes to close a loan, so it’s important to get multiple quotes when shopping around for a loan. You should try to get quotes from at least three lenders, but preferably more if you have the time, so you don’t miss out on a better loan offer. It’s important to compare different kinds of lenders too. Online banks, for example, often have lower rates and qualifying requirements than traditional banks because they require less overhead to run their business.
Avoid Hard Credit Inquiries
When you are shopping around for financing, some institutions will cause a hard credit inquiry to be placed on your credit report. Too many of these hard inquiries can hurt your credit score and can stay on your credit report for up to three years. Luckily, many lenders will pre-approve you for a loan and disclose their rates and terms before placing a hard inquiry onto your record. In these instances, the companies will ask you to provide your Social Security number and some other basic information, and then perform a soft inquiry to find out what interest rate you’ll qualify for. You can then decide if you want to move forward with that lender and have them place a hard inquiry on your report. Lenders that make it easy to comparison shop with soft inquiries allow you to protect your credit score while finding the best deals available on financing.
Compare Apples To Apples
When comparing loan rates from multiple lenders, it is important to make sure the type of terms are similar, not just the scheduled payments. If, for example, one lender offers lower monthly payments but a longer repayment schedule, you may end up owing more in total for the loan than you would for a loan with higher monthly payments due to the added interest you’ll end up paying. Always consider whether both lenders are offering fixed-rate loans. Variable loan rates generally have a lower starting interest rate versus fixed-rate loans. These loans may seem like a sweeter deal because of the lower rate being offered, however, you’ll be increasing your risk with a variable-rate loan because the interest rate could rise during repayment. When rates increase, total loan costs go up in addition to the monthly payments. That said, sometimes a variable-rate loan can make more sense, especially if you plan to pay the loan off early and can afford higher payments for a short period of time. Always make sure you compare loans with the same type of interest rate structure so you can get the best deal regardless of which type of loan you end up taking out.
Compare Total Costs
You always want to keep borrowing costs as low as possible, so it is common sense to go with whichever loan offers the lowest total overall costs including interest rates and fees. When comparing rates, it’s critical to compare the APR not just the interest rate. The APR includes any added fees to show you what the total rate is that you will pay per year for borrowing money. A lender should be able to tell you the total interest you’ll pay over the life of the loan, which is affected by your payment timeline and how often interest compounds. Clearly understanding the total interest you’ll pay can help you pick the loan that will cost you the least in the end. This way is a better bet than focusing just on monthly payments or annual interest rate, which can show a misleading picture if one loan has a longer loan repayment term or has more fees versus another.
Read The Fine Print
Always read the fine print for any loan you consider to find out all of the hidden details that could result in added costs. For example, some lenders charge prepayment penalties meaning that if you decide to pay your loan off early, you could end up paying more for the loan than you might for a comparable loan without a prepayment fee. Some variable-rate lenders may adjust rates more frequently than others, which increases the likelihood of rates rising during the repayment term. You need a complete understanding of the loans fine print terms to understand all of the risks and potential charges you could incur in order to make a fully informed choice about which lender is actually best for your situation.
Taking the time to compare loan offers is important, as some lenders offer significantly better deals than others. You don’t want to pay more to borrow than you need to, so make sure you follow the tips above when you shop around for your next loan.