How to compare loan offers

Before getting any kind of funding, whether it be personal loans, bad credit loans, or installment loans, it’s essential to compare loan offers if you want to find the best deal. Financial experts advise that borrowers compare offers from at least three lenders before submitting a loan application. 

The most common type of funding that comes with a loan estimate is a mortgage. However, borrowers can request a loan estimate for just about any type of funding.

Here you will learn how to research different types of funding, how to prep your finances for a loan, and the crucial factors to consider when comparing loan estimates to make sure you find the right loan for you! 

What To Consider When Comparing Offers and Loan Estimates

According to The Mortgage Reports, about one in ten mortgage applications are denied.1 Perhaps this statistic would be less drastic if borrowers compared loan estimates before submitting an application! 

When looking through different lenders and loan types, compare core components of your funding, such as funding time, loan amount, monthly payment, interest rate, loan terms, and extra fees/charges.

Below are more details on the important factors to consider that will help determine your loan estimate. 

Funding Time

How soon do you need your loan money? If the answer is “right now,” there may be certain loan types that will work better for you than others. Some lenders require lengthy application processes and sometimes even in-person meetings before they will consider approving an applicant for a loan. 

However, there are other lenders who can connect qualified borrowers to cash in just a few hours or less. When talking to different lenders, it may even be worth your while to ask them how long does it take to have a loan approved?

Loan Amount

In addition to thinking about your desired funding time, ask yourself how much money you will need in total. To answer this question, think about what you are looking to pay for with your loan. If you have a big purchase or a major expense to take care of, you will most likely want a larger loan than if you only needed a few hundred dollars to get by until your next payday. 

Monthly Payment

Another major aspect of a loan is the monthly payments. Getting a loan is an important commitment, so making sure you can afford your monthly payments is essential. Usually, your monthly payment is determined by a combination of factors, including: 

  • Loan amount.
  • Interest and annual percentage rate charges. 
  • Loan terms.
  • Borrower’s credit score. 

Interest Rate / Annual Percentage Rate 

Interest rates play a huge role in determining the actual cost of a loan. Usually, borrowers with ideal credit scores will have an easier time finding approval on loans with lower rates than borrowers with less-than-perfect credit.

There are a few different ways lenders can calculate interest on a loan. The two most common ways are via fixed or variable rates. Fixed interest means the rates of the loan will stay the same throughout the repayment period, while variable rates are subject to change in response to current market conditions. Personal installment loans are one of the most sought-after loan types that usually come with fixed rates. An adjustable rate mortgage is one of the most common loan types that can come with variable rates. 

Repayment Term

How long do you want to take to pay off your loan balance? The more time you need, the longer your loan term will be. While a longer loan term may seem like the most convenient option on the surface, remember that it will also cause the borrower to pay more in interest rate charges over the life of their loan. 

Fees and Charges

When calculating the total loan costs, don’t forget to include all lender charges and loan fees. You can discuss what additional charges you can expect with your loan officer during the approval process. 

Some common fees and charges you may come across with loans are: 

Types of Loans To Consider for a Loan Estimate 

Below is more information on some loan options you may consider when researching personal loans and other types of funding. 

Unsecured vs. Secured Personal Loans

Loans are typically broken down into two distinct categories; secured and unsecured debt. Secured loans require collateral in exchange for funding and are, therefore, more popular with borrowers with a poor credit history working against them. Unsecured loans do not require collateral, meaning lenders may focus on financial factors like credit scores, income, and ability to repay the loan when determining approval.  

Personal Installment Loans

Personal installment loans are a type of personal loan that typically comes with a fixed interest rate. This type of loan is distributed to borrowers in a lump sum and paid back with equal monthly installments. Since personal installment loans are usually offered by personal direct lenders, borrowers can enjoy benefits like: 

  • Easy, online process. 
  • Competitive interest rate.
  • Flexible repayment schedules. 
  • Convenient monthly payments. 

Cash Advance

A cash advance loan is a type of funding that comes in physical cash instead of credited cash sent directly to a borrower’s bank account. Cash advance loans are typically designed for people who are looking for funding to help them get by until their next paycheck. 

Some common types of cash advance loans are: 

  • Payday loans
  • Credit card cash advances
  • Employer cash advances
  • Mobile app cash advances

Debt Consolidation Loans

Debt consolidation loans were designed for people who are dealing with a massive amount of debt. When you have multiple loan balances, you may end up wasting hundreds or thousands of dollars in interest rate charges. Debt consolidation loans can help high-debt borrowers reduce the number of monthly payments they are responsible for and potentially increase their credit score over time as they pay off their balance.  

Car Title Loans

Car title loans are a type of secured funding where borrowers use their free-and-clear vehicle title as collateral. While borrowers may maintain access to their vehicle while they repay their title loan, their lender will still sign onto their vehicle title as a lien holder. 

Vehicle Pawns

A vehicle pawn requires borrowers to give their vehicle to a pawnshop in exchange for money. Borrowers may not have access to their vehicle until they have completely paid off their auto pawn loan balance. 

Mortgage Loan or Adjustable Rate Mortgage 

Homebuyers may take out a mortgage loan to pay for their newly acquired property. When you compare mortgage offers and mortgage lenders, be sure to ask about the following loan costs that will most likely come with your funding agreement: 

  • Down payment.
  • Closing costs.

Auto Loan

An auto loan is a type of funding designated specifically for purchasing a vehicle. You can get a car loan from auto lenders, banks, or directly from the dealership. Terms and rates of automobile loans are usually directly tied to the borrower’s credit score and financial history. 

Types of Lenders To Compare

Lender Type Description
Online Direct LenderProvides the most flexibility when it comes to borrowing money. Offers a virtual funding process and flexible approval requirements. Ideal for borrowers with poor credit, no credit, or a history of bankruptcy.  
BanksTraditional financial institutions that offer a variety of loan types. Usually only approve applications for borrowers with ideal credit scores. 
Credit UnionsNon-profit financial institutions that provide funding to its members. Membership may require having a certain job, location, or tax bracket. Many are small local organizations and may not offer online applications or mobile banking. 
BrokersNot direct lenders, but claim to connect borrowers to the best possible loan deal. Often work alongside other direct lenders and may connect you to a specific lender to receive a commission. Can be helpful for first-time borrowers new to financing, but decisions should not be based solely on broker advice. 

What To Do Before You Apply for a Loan Estimate

While it is definitely possible to get a loan without much preparation, it may be in your best interest to do a bit of financial prep before you dive into a loan commitment. Below are some tips to follow that may help guide you toward finding the best loan estimates. 

Research and Compare Loan Offers and Lenders

One of the most important steps in acquiring a loan is to compare lenders and products before you apply. By doing a bit of research, you may find you are able to receive more funding, better terms, or a lower monthly payment with one type of lender over another. 

You can compare personal loans and other financial products by evaluating the core funding elements discussed above: 

  • Funding time
  • Loan amount
  • Monthly payment 
  • Interest rate
  • Repayment term
  • Additional fees/charges

Check Your Credit Score

Besides comparing loan offers from multiple lenders, you may also want to check your credit score before submitting a credit application. Some lenders and loan types are only available to people who have a certain credit score. By checking your most recent score, you can eliminate lenders or loan products that may not work well for your current financial situation. 

Review Your Current Debt

Take a look at the various debts you owe. These debts may include: 

  • Credit card debt (In 2021, the national average credit card debt was $5,525, so this is clearly an issue for many consumers)2
  • Student loan debt
  • Past due bills/delayed payments
  • Balances from previous loans

If you already have a significant amount of debt, or if your credit utilization ratio is well over 30%, you may want to think again about applying for a loan. Perhaps you can explore your other options, such as dipping into a savings account, getting a second job part-time, or asking a trusted friend or family member to loan you the money you need. 

Develop a Financial Plan

It’s never a good idea to go into a loan blindly. Before you apply, think about how you are going to repay your loan and how long it will take. You may develop a financial plan that includes making payments on time, setting money aside in case of an emergency, or applying for a loan amount that fits in with your personal budget.  

How Does Getting a Loan Work?

  • Step One: Complete a Loan Application 
  • Step Two: Receive a Loan Estimate 
  • Step Three: Send In Your Documents
  • Step Four: Sign Your Contract and Get Cash! 

How To Manage a Loan

Once you have your loan, it’s time to start implementing your financial plan and repay your balance. Below are a few tips that may help you manage your loan. 

  • Make payments on time
  • Pay more when you can
  • Think about refinancing in the future

Loan Estimate FAQ

What is a loan estimate?

A loan estimate is a three-page document that you receive after applying for a mortgage. It outlines the important details about the loan you’ve requested, including the estimated interest rate, monthly payments, and total closing costs for the loan. It also gives you information about the estimated costs of taxes and insurance, and how the interest rate and payments may change in the future.

What are closing costs and how do they affect my loan estimate?

Closing costs are fees paid at the closing of a real estate transaction. Usually, closing costs include charges for services such as title searches, property appraisals, and processing fees. These closing costs are outlined in your loan estimate and can significantly impact the total cost of your mortgage loan.
Mortgages are typically the only type of funding that come with closing costs. Funding like payday loans, personal installment loans, etc. do not have closing costs.

What is mortgage insurance and is it included in the loan estimate?

Mortgage insurance is a policy that protects lenders against losses that result from defaults on home mortgages. If your down payment is less than 20% on a conventional loan, your lender will typically require you to pay for mortgage insurance. This cost will be included in your loan estimate.

What does ‘total interest percentage’ mean in a loan estimate?

The Total Interest Percentage (TIP) is a calculation that shows you the total amount of interest you’ll pay over the loan term as a percentage of your loan amount. It helps you understand the true cost of borrowing and is a useful tool when comparing loan estimates.

How can I use a loan estimate to calculate my monthly mortgage payment?

Your loan estimate outlines your projected monthly mortgage payment. This includes your principal and interest payment, any mortgage insurance costs, and estimated escrow payments for property taxes and homeowners insurance.

What are ‘services you cannot shop for’ on a loan estimate?

‘Services You Cannot Shop For’ are services required by the lender to process and close your loan. These services are provided by companies chosen by the lender, and you cannot shop around for them. They include services like the appraisal, credit report, and flood determination.

How can I use loan estimates to compare mortgage loans?

Loan estimates provide a standardized way to compare mortgage loans. You can compare the loan terms, interest rate, monthly payments, and total costs between different loan estimates. This can help you choose the loan that best fits your needs and financial situation.

A Note From CreditNinja

CreditNinja knows that finding the right kind of loan can be stressful, especially when you are going through a financial emergency. That’s why we seek to make the personal loan process as streamlined as possible with a fast, easy online application, flexible payback schedules, and dedicated customer service. Let CreditNinja help you get your finances back on track once and for all!

References: 

  1. How many lenders should you apply to for a mortgage?
  2. Average 2023 Credit Card Debt + Statistics in America
  3. Personal Loan Statistics | Chamber of Commerce
  4. Comparing loan offers | Consumer Financial Protection Bureau
  5. Loan Comparison Calculator | Finaid
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