5 Things to Consider When Choosing a Loan Provider
Loans are available in various terms, sizes, and shapes. When choosing a loan product, understanding your options and each lender’s requirements will make it much easier to get the financing you need. In this guide, you’ll learn what to consider when choosing a loan provider.
Different Types of Loans Are Available
Before taking out a loan with the best loan provider, it makes sense to research your options. These include:
- Personal loans. A secured loan is backed by personal property or another form of collateral, and they’re frequently offered to those with little to no credit. Unsecured loans are based on a borrower’s credit score, and there’s no collateral requirement. Here, the better your credit is, the less interest you’ll pay over the loan term.
- Business loans. Every lender offers different products, and we’ll discuss a few of the most common choices. Term loans are general-purpose products that are repaid over a predetermined period, while short-term loans are taken temporarily and paid back in a lump sum. An equipment financing loan is secured by the equipment itself, and a line of credit is a set amount granted yearly and repaid quickly.
- SBA loans. These loan products are offered by financial institutions and banks, and they’re backed by the Small Business Administration. For additional information on different SBA loan options, visit their website.
- Student loans. A student loan can be obtained through a private lending institution or from the federal government. Students can apply for aid by visiting the Free Application for Federal Student Aid (FAFSA) website.
- Mortgages. A mortgage or home loan can be fixed-rate (a set interest rate that doesn’t change over the loan’s term) or variable-rate (the rate may change depending on market conditions). The federal government offers VA, RHS, and FHA loans.
- Home equity loans. These are taken as lump sums and are backed by the equity a person has in their home. Funds can be used for various purposes, such as eliminating credit card debt or financing a large purchase.
- HELOC or home equity lines of credit. The amount will depend on the level of equity an owner has in his or her home. Again, the proceeds of a HELOC can be used for any legitimate purpose.
- Home improvement equity loans. Here, a loan is taken against the equity built into the home. However, home improvement equity loans come with strict requirements. These funds must be used to pay for home improvements, repairs, or renovations.
If you’re unsure which type of loan you need, consult a local lender or a financial advisor today.
Interest Rates May Vary
No matter which kind of loan you obtain, you’ll need to focus on interest rates. After all, they’ll play a crucial role in determining the total amount to be repaid. Because most financial institutions and lenders are competing for borrowers’ business, it might be wise to shop around for the lowest possible interest rate. When doing so, be sure there aren’t any hidden fees, like:
- Appraisal fees
- Origination fees
- Administration fees
- Underwriting fees
- Processing fees
- Credit reporting fees
While these fees may not raise a loan’s interest rate, they will be rolled into your monthly payments. In this event, you’ll likely be better off picking a loan with a slightly higher rate than going with one that comes with high upfront or monthly fees.
The Loan Term
Depending on the type of loan you’re getting, the term will play a key role in determining the amount to be repaid. Because different products are set up in unique ways, and because loan terms vary widely, it’s best to discuss your choices with a financial institution or lender.
Some loans charge additional fees, called prepayment penalties, if a loan is paid off early. If you take out a loan with plans to pay it off before it’s due, be sure to ask about potential prepayment penalties.
For some federally backed student loans, the government covers the interest for a predetermined time after graduation, if the borrower meets all requirements. Typically, these loans require full repayment within a set timeframe, but there are ways to qualify for loan forbearance or deferment.
The Size of the Down Payment
The amount of money put down on a loan depends on the lender’s requirements. Some loans don’t require a deposit. For instance, a home equity loan uses the home itself as collateral, so there’s no need for a down payment. However, for an auto loan or a home mortgage, it makes good financial sense to offer a sizable down payment.
In most cases, mortgages require a down payment of three to five percent. Some financial institutions, though, do offer no-down-payment incentives to qualified buyers. Your situation and your credit standing will determine the size of the down payment you’ll make.
Remember that the more you put down on a car loan or a mortgage, the lower the total amount will be. Down payments will also work to reduce monthly payments. To understand the effects of a down payment on a loan, consult your lender, bank, or financial advisor.
Your Financial Situation
When you’re thinking of taking out a loan, the most crucial factor in the decision is your finances. Looking at your yearly and monthly budgets will help you determine how much you can afford to pay, which will lead you to decide on an appropriate loan amount.
If you decide to borrow money, check your credit status to ensure that you’ll be approved for the most favorable rates possible. You’re entitled to a free credit report each year. When you obtain it, be sure that your credit is in good shape and report any errors right away.
Whether you’re taking out a loan to get a car, finance home upgrades, pay for a child’s college education, or eliminate high-interest debt, it’s important to go into the process well informed. By considering the five factors listed above, you’ll come away with all the information needed to make the right decision when it comes to finding the loan provider that’s right for you.
Cary Silverman is a consummate entrepreneur having sold multiple companies during his 20 years of business experience in the financial industry, but for him, it isn’t about the money. His success is rooted in his passion to focus on doing something better today than it was done yesterday. These days, he’s the CEO of Waldo General, Inc. that oversees the operation of King of Kash.