Thinking of taking out a loan? Start by comparing your options to find the loan that’s right for you!
Many of life’s biggest moment also require a large amount of money, which is where loans come in. If you’re looking for a house, buying a new car, or getting married, you may need a loan. The questions then become: Which one, and for how much? To answer these questions, you’ll need to compare loans.
Comparing loans helps you find the right loan for you. For instance, if you’re remodeling your kitchen, should you choose a home equity loan or a home equity line of credit? Should you compare personal loans with those two options as well? Finding the right loan for you is important to ensure you get the best rate and terms. If the APR is too high or the terms too aggressive, you could end up damaging your finances.
We’ll go through the most common types of loans, their pros and cons, how to compare loans, and how to compare loan rates to help you make an informed decision!
Why do I need a loan?
In order to compare loans and narrow down your options, you need to understand why you need a loan in the first place. Most people need to secure financing because they don’t have thousands of dollars sitting around to pay for large expenses.
Some of the most common scenarios that require a loan include:
- Buying a car
- Consolidating debts
- Emergency expenses
- Funeral expenses
- Home improvement
- Medical expenses
- Pay off credit cards
- School tuition
- Special event
- Starting a business
What types of loans are available?
While there are several different types of loans based on your needs, they each fall into one of two main categories — secured or unsecured.
- Secured: These loans are backed by collateral, which means you put something up (typically your car, house, or other valuable asset) to guarantee that you’ll repay the loan. In the event that you don’t repay the loan and default, the asset can then be forfeited or seized.
- Unsecured: On the flip side is unsecured loans. These are loans that are not backed by an asset and therefore consider to be “higher risk” loans. Because the lending institution is taking a chance on you and your ability to repay, unsecured loans typically come with higher interest rates.
Within these two categories, there are several different types of loans you can choose from (some you’re probably familiar with, such as a mortgage or auto loan). The type of loan you get and whether it is secured or unsecured will determine how you pay it back and what happens if, for some reason, you’re unable to pay.
Types of secured loans:
- Auto loan – A loan is granted to help you pay for your car over a certain person of time and your car can be repossessed if you fail to pay.
- Business loan – These can be both secured and unsecured. Secured business loans will require you to put something up as collateral, but you may get a lower interest rate.
- CD or savings loan – A hold is placed on your certificate of deposit or savings account allowing you to borrow up to 95% of its funds.
- Home equity loan – This allows you to borrow against your home’s equity for a lump sum, fixed-installment loan.
- Home equity line of credit – A HELOC allows you to draw money from your home’s equity as needed for up to 10 years before repaying.
- Mortgage – Your new home is put up as collateral and can be foreclosed if you fail to pay your mortgage.
- Personal loan – These can be both secured and unsecured. Typically, if you have a lower credit score, you’ll be required to take out a secured personal loan.
Types of unsecured loans:
- Business loan – These can be both secured and unsecured. Unsecured business loans typically have higher interest rates and shorter term lengths since there is more risk.
- Personal loan – These can be both secured and unsecured. If you have a good to excellent credit score, you can probably negotiate better interest rates and terms for an unsecured personal loan.
- Student loan – Both federal and private student loans are considered unsecured debt; however, they do differ in their interest rates and terms.
Pros and cons of secured loans
Some of the positive aspects of secured loans include:
- Build your credit – Secured loans are great for anyone with bad or poor credit because they minimize risk for the lender while helping you build credit when you make payments in full and on time.
- Lower interest rates – Because you’re putting something up as collateral to cover the loan, lenders will often give you lower interest rates since their risk is now minimized.
- Bigger loan amount – By securing your loan with collateral (your house or your car), lenders will often grant larger loans to cover these big purchases.
- More favorable terms – With a secured loan, you’re more like to get a longer repayment window and a better interest rate, such as a 30-year fixed 3% interest mortgage.
Some of the potential negative aspects of secured loans include:
- Loss of asset – If you default on your loan, then you may need to forfeit the asset you put up for collateral, or the lender can seize it.
- Damaged credit – As with any loan (secured or unsecured), failure to meet the loan terms could result in your credit score decreasing.
Pros and cons of unsecured loans
Some of the positive aspects of unsecured loans include:
- Build your credit – Making payments on time and in full on any type of line of credit will help boost your credit score over time.
- No risk of assets – Since unsecured loans don’t require collateral, you won’t typically have to worry about losing your home or car if you fall on hard times and can’t make payments.
- Easier application – For the most part, unsecured loan applications are easier to fill out since there’s no need to evaluate collateral.
Some of the potential negative aspects of unsecured loans include:
- Still held responsible – Just because you didn’t put up collateral doesn’t mean a lender won’t take action if you stop making payments altogether. Lenders can sue you in court and place a lien on your assets to secure payment.
- Smaller loan amount – Since your loan isn’t backed by an asset (and therefore considered riskier), lenders may not be as willing to lend you large amounts.
- Higher interest rates – Again, since unsecured loans are considered riskier without collateral, they usually have higher interest rates and may come with other fees.
- Damaged credit – As with any loan (secured or unsecured), your credit score could take a hit if you fail to make payments.
How to compare loans and loan rates
Once you understand why you need a loan and what type of loans are available to you, it’s time to start comparing the loans and loan rates to find the best option to meet your needs.
Here’s how to get started:
Step 1: Decide which type of lender is best for your needs
Before you can get a loan, you’ll need to decide which type of lender — bank, credit union, or online lender — is right for you. Each type of lender has their own pros and cons, so which one you choose will ultimately come down to the type of loan you want and the financial institution you feel most comfortable working with.
Some things to consider:
- Bank – Getting a loan from a bank is the most common option. You can easily keep all of your finances under one roof (if you already have a bank for checking or savings), there are brick-and-mortar locations, and you may be able to secure better terms if you’re a longtime customer. On the downside, there may be fewer unsecured options and applicants with bad or poor credit may have a harder time getting approved.
- Credit union – You’ll need to be a member of a credit union to take advantage of their loan options so be sure to inquire about that first and make sure they offer the loan you’re interested in. Once you’re a member, though, you may enjoy lower interest rates and an easier approval process. Additionally, there are brick-and-mortar locations you can visit in person.
- Online lender – Typically with online lenders, you’ll be limited to only unsecured loan options, so you may get a higher APR. However, the process is generally more convenient with easier approval (it’s all online!). Exercise caution when looking at online lenders, though. There are many predatory sites out there, so make sure you’re working with a reputable lender.
Step 2: Get multiple quotes
Once you have a general idea of what type of lending institutions may be right for you, it’s time to get quotes. It’s important to shop around — try to get at least three quotes — so you can compare the terms of each loan.
Some quote options to consider:
- Get quotes from multiple financial institutions – If you’re open to working with all three types of financial institutions, you can get quotes from a bank, a credit union, and an online lender to see who has the best rate.
- Get quotes from multiple lenders – If you know you want to just work with a bank, for instance, you can get quotes from multiple banks to compare their terms and rates.
- Get quotes for multiple types of loans – Depending on your financial needs, there may be a few loan options available to you. For instance, with our kitchen remodel example above, you’ll probably want to get a quote for a home equity loan, a home equity line of credit, and a personal loan to see which offers the best terms based on your creditworthiness.
Step 3: Compare the offers side-by-side
After you receive multiple quotes, it’s time to compare the offers side-by-side. Unfortunately, no two loan offers will look the same, so you’ll have to put in some work to compare loan rates. Create a spreadsheet or list that you can fill in based on each offer.
Here are some items you’ll want to consider:
- Type of loan
- Amount you’re borrowing
- Interest rate
- Annual percentage rate (APR)
- Monthly payment amount
- Lender fees
- Late payment fees
- Other fees or points
- Term of loan
- Prepayment penalty
- Lock-in period
- Terms of defaulting
Make sure you completely understand the terms of each offer before you make a decision.
Step 4: Negotiate
If you want the best deal, you have to be willing to speak up and negotiate. Don’t be afraid to ask the lender if they’d be willing to waive or reduce certain fees, or if they would agree to a lower interest rate. In some cases, they may agree on the spot, but in other cases, they may propose a compromise (for instance, put an extra $1,000 down to waive $1,500 in fees). The bottom line is, though, that it doesn’t hurt to ask.
Once you feel confident that you’ve found a loan offer that meets your needs, you understand the terms completely, and you’ve negotiated as much as you could, you’re ready to sign!