Finding a reputable lender is not your only concern before submitting a loan application. Make sure to compare loans carefully before you sign on the dotted line. Even within the same company, you may find that a different lending product better meets your needs.
Look at terms
To compare loans, you must understand the nuances of the terms. Is your rate fixed or variable? Can payments ever increase? Are you providing collateral or only a signature? Ask your lender to prepare a document with all the relevant information for the various loan products that fit your situation and start with these questions.
For instance, using a fully paid vehicle for collateral carries an additional cost as a result. Unless you already maintain full coverage insurance on the car, your insurance premium increases. This increase may eliminate the interest rate savings you gain by not using an unsecured personal loan product. Always think through the seemingly unrelated details affected by your loan choice to make sure you get the best loan possible.
Calculate savings
Introductory rates offered by financial institutions are tempting and effective ways to get you in the door. Read the fine print on the offer and do the math when you compare loans to see if the deal is as good as it looks. You may find a loan with a slightly higher rate is the better option.
Let’s say you have two loan offers to compare for a term of four years. Lender A is offering $10,000 at a flat rate of five percent, while Lender B offers $10,000 at an introductory rate of zero percent for one year and a go to rate of 10 percent. Paying no interest upfront sounds like a good deal, but what do the numbers say?
Using a simple interest calculation, Lender A charges $500 in interest for the funds. Lender B, on the other hand, receives an average interest rate of 7.5 percent, which equates to an interest cost of $750. Depending on the interest calculation method your lender uses, these numbers will vary. Always find out the total interest cost assuming no early prepayment and compare those figures in addition to interest rates and payments.
Think about benefits
Another factor when you compare loans is whether it offers additional benefits beyond the borrowed money. Mortgages, home equity loans and home equity lines of credit offer a potential tax savings on your income taxes for interest paid. Always consult your tax advisor before assuming you qualify for the deduction, but if you do, know that these tax savings can make a tax advantaged loan product more attractive than a regular personal loan.
Learning how to compare loans doesn’t have to be a lengthy process. Simply gather information on a variety of options and take the time to review each before making a final decision.
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