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.
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 offers to make sure you find the right loan for you!
What To Consider When Comparing Offers and Loan Estimates
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 before you borrow money.
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.
By thinking about how soon you need your loan funding, you may narrow down your available options; that way, you don’t have to waste your time researching lenders who wouldn’t have worked out for you. Narrowing down your funding options will also make it easier to compare offers. 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.
Thinking about your desired loan amount will also help you come up with a payment plan. Loans with high funding amounts will take longer to pay off than smaller amounts of funding. But keep in mind that high loan amounts may also mean higher interest rate charges as well.
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: Lenders may take a percentage of your total loan amount and break that down to determine monthly payments.
- Interest Rate Charges: Payments will usually cover your monthly principal along with interest charges. Higher rates will have more of an impact on monthly payments than lower rates.
- Loan Terms: Longer loan terms may be able to come with smaller monthly payments, while shorter terms typically require higher amounts due each month.
- Borrower’s Credit Score: It may be easier for borrowers with good credit to receive lower monthly minimums.
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 cost of your loan, 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:
- Origination Fee: Some lenders charge origination fees, also known as application fees, in exchange for them going through the underwriting process and drawing up an approved borrower’s loan contract.
- Prepayment Penalty: Prepayment penalties, also called early payment fees, are charges some lenders impose on borrowers who make their loan payments before their monthly due date. Prepayment fees may prevent you from being able to pay your loan off early.
- Late Payment Fee: While not all lenders charge prepayment penalties, many lenders do charge late payment fees. Borrowers who make their monthly payments after their designated due date may accrue additional charges, known as late fees, on their loan balance.
- Insufficient Funds Fee: If you are signed up for automatic payments on your loan and don’t have enough money in your checking account to cover the monthly payment, your bank may charge you an insufficient funds fee, also known as an overdraft fee.
- Balloon Payment: A balloon payment is a large sum of money that is due at the end of a loan term. Due to the inconvenience they can impose, it may be a smart decision to stay away from loans that require balloon payments.
Types of Loans To Consider
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
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 costs that will most likely come with your loan:
- Down Payment: A down payment is a percentage of a loan that borrowers are required to pay upfront. Certain types of loans, like mortgages, require a down payment. Depending on your credit score and financial history, you may be able to negotiate your down payment with mortgage lenders.
- Closing Costs: When your mortgage lender draws up your mortgage loan contract, they will also include closing costs. Homebuyers and sellers are usually responsible for closing costs in order to complete their real estate transaction.
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
Consider comparing lenders such as:
- Direct lenders online.
- Banks.
- Credit unions.
You may also consider working with a brokerage company as a starting point in your loan search.
Online Direct Lender
A direct online lender will most likely be able to provide you with the most flexibility when it comes to borrowing money. Not only can online lenders provide borrowers with a virtual funding process, but they can also provide flexible approval requirements when it comes to credit scores and financial history. So, if you have poor credit, no credit, or a history of bankruptcy, online direct lenders may work well for you.
Banks
Banks are traditional financial institutions that offer checking and savings accounts, provide various financial services, and offer a variety of loan types. While you can apply for just about any kind of loan with a bank, they will usually only approve applications for borrowers with ideal credit scores.
Credit Unions
A credit union is a non-profit financial institution that provides funding to its members. Depending on the credit union, you may find that you have to have a certain kind of job, live within a particular district, or fall within a specific tax bracket in order to qualify for membership. Furthermore, many credit unions are small local organizations and may not be able to provide the convenience of online applications and mobile banking. This means you may potentially have to visit a location in person to apply, sign your loan contract, and even make your monthly payments if you decide to go with certain credit unions.
Brokers
A broker is not a direct lender, but a financial institution that claims to connect borrowers to the best possible loan deal. However, brokers are often working alongside other direct lenders and may connect you to a specific lender just so they can receive a commission. While a broker may be a helpful tool for first-time borrowers new to financing, you probably don’t want to make major financial decisions solely based on advice from a loan broker.
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 Loans and Compare 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.
- 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?
Done comparing offers and ready to get your loan? Thankfully, the process is usually quite simple. You can apply for a loan online, over the phone, or even in person. However, utilizing the online loan process is by far the fastest and most efficient way to get your money. Here’s how the loan funding process works!
Step One: Complete a Loan Application
After you’ve researched several lenders and decided on the best one, head over to their website and fill out an application. Your initial loan application will ask for a few basic pieces of information, such as your name, address, desired loan amount, and general income.
During this pre-approval process, your lender may pull a soft credit check. Soft credit checks are an unofficial look into your credit history and have no impact on your overall credit score or future credit reports. This initial credit check is usually performed to make sure borrowers are not going through bankruptcy or pre-bankruptcy credit counseling.
After you have submitted your information, you should hear back from a loan agent with more information about your approval status and potential loan offer shortly.
Step Two: Receive a Loan Estimate
Upon approval, your lender will contact you to discuss the core elements of your loan, including the initial loan estimate. Depending on your lender, you may even be able to work with a loan agent to develop a custom payment plan designed specifically for your budget and financial situation. Other aspects of your loan you should discuss with your agent, besides the loan amount, are repayment terms, interest rates, and any additional fees/charges that may come with your loan.
At this point in the process, your lender may also request a hard credit check. When a lender pulls a hard credit check, they request an official copy of your most recent credit report from one of the three major credit bureaus (the three major credit bureaus are Experian, TransUnion, and Equifax). Hard credit checks do affect your future credit reports, which is why you should try to limit your loan applications to just one or two.
Step Three: Send In Your Documents
Next, your lender will request a few pieces of documentation to confirm the information given in your initial application.
The basic personal loan documentation you will need is:
- Government-Issued Photo Identification: To prove your identity, you can use documents like your driver’s license, state-issued ID, or passport.
- Proof of Income: Lenders need to make sure that borrowers have a way to repay their debts, which is why they ask for a proof of income. You can prove your income for a personal loan with documents like your pay stubs, bank statements, or even tax documents.
- Proof of Residency: To ensure your lender is pairing you with the correct loan product, interest rates, loan amounts, etc., they will need to see proof of your residency. You can prove residency with documents like a lease agreement, mortgage statement, utility bill, or any other important piece of mail with your name and address on it.
- Checking Account Information: While not all lenders require borrowers to have a bank account, many do. When you send bank account information (bank account and routing number) to your lender, you are giving them access to send you your approved loan funds via direct deposit.
Step Four: Sign Your Contract and Get Cash!
Once your documents have been processed, your lender will send you a loan contract to sign. However, before you go ahead and sign your loan agreement, make sure you read it over thoroughly. Signing a loan contract means you are committing to adhering to the interest rates and terms laid out in the agreement. Violating your loan contract can be detrimental to your budget and credit score, so make sure you understand everything before you sign!
After signing, you can expect your money as soon as the same day or the next business day. You may even be able to receive your money in a few hours or less if you opted for direct deposit!
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: It is essential that borrowers make their loan payments on time. Staying on top of your monthly payment will prevent you from accumulating late fees or extra charges, as well as ensure that you pay off your loan on time.
Another incentive to stay on top of your loan payments is the positive effect that behavior can have on your credit report. Payment history is the most influential factor that contributes to your credit score, so making sure you pay on time may even help you improve your credit over time.
- Pay More When You Can: If possible, try to pay more than your minimum amount due on your money payments. Contributing more to your loan payments each month will not only help you pay off your loan early, but it may also help you save money on interest rate charges. The lower your balance is, the less funding there is to charge interest on. You can even try to make an extra loan payment every now and then to pay off your loan even faster!
- Think About Refinancing In The Future: If you have a substantial amount of debt, it may be in your best interest to refinance with a debt consolidation loan. Depending on the loan deal you originally received, you may be able to get a lower monthly payment and possibly additional funding by refinancing. Furthermore, existing customers may even be able to take advantage of special deals if they refinance with the same lender.
References:
Personal Loan Statistics | Chamber of Commerce
Comparing loan offers | Consumer Financial Protection Bureau
Loan Comparison Calculator | Finaid