Tips for Getting the Best Loan for Your Needs

Emergency expenses like car repairs and medical bills can crop up at any time, and many Americans aren’t prepared to deal with such a strain on their income. In fact, 34 percent of adults wouldn’t be able to cover a $400 unexpected cost without borrowing money or selling belongings, according to a report from the Federal Reserve. That’s reflected in the number of borrowers currently carrying a debt balance. In the first quarter of 2021, 18.9 million consumers had outstanding unsecured personal loans with an average debt of just under $9,000. In some cases, borrowing money can be a healthy way to reach your goals. For example, getting a mortgage for a house can help you begin to build equity and wealth for the future. Taking out an auto loan could enable you to commute to a higher-paying job. And applying for a home equity loan may help you pay for the home improvements necessary to sell your house at a higher price. Whether you’re looking to borrow to reach a financial milestone or you need quick cash to cover emergency bills, you should take a moment to carefully compare your borrowing options. No two loans are the same, and understanding your individual needs will help you select the best loan for your budget and circumstances. Read on for tips on how to get a loan that meets your needs.

Check Your Credit Before Applying

Most lenders will check your credit when deciding whether to approve you for a loan. Your credit score represents your creditworthiness, or the likelihood you’ll repay the loan in the eyes of the lender. Knowing your credit score can help you identify loans that you’ll be eligible for. To start, locate your free credit score at AnnualCreditReport.com. You should look for any errors on your credit report. If you find any, dispute them with the creditor. Common errors include:

• Incorrect identifying information
• Accounts opened through identity theft
• Incorrect status reports, including accounts incorrectly marked as late
• Multiple listings for the same debt
• Incorrect current balances
• Incorrect credit limits

If you can wait to apply for a loan, you may want to take steps to improve your credit. This will help you achieve a lower interest rate, which means you’ll spend less money on repayment. There are five factors influencing your credit score that you can seek to improve:

• Payment history: Always make your payments on-time and dispute any incorrect late payments
• Credit utilization: Pay off debt or ask for a higher credit limit
• Length of credit history: Avoid closing any old accounts
• Credit mix: Make sure to stay on top of all types of credit
• New credit: Don’t apply for more than one credit card at a time, and apply sparingly when comparing loans

Choose the Right Type of Loan

If you’re buying a home, you’ll choose the type of mortgage loan you are eligible for that is most affordable. If you need money for an emergency expense or home improvement project, you’ll face a different set of choices. You might choose one of the following options, depending on your credit score, current assets, and loan purpose:

• Auto Equity Loan: An auto equity loan is a secured loan that allows you to borrow against the equity you have in your vehicle. It often makes sense for emergency car repairs. You may be eligible if you’ve made payments on your vehicle, and you’ll likely get a lower interest rate than you would with a personal loan. However, if you fail to make payments on your auto equity loan, your vehicle could be seized. Make sure to choose a monthly payment you can afford.
• Home Equity Loan: A home equity loan allows you to borrow against the money you’ve put into your home. These loans are especially useful for home repairs and improvements. Most lenders will allow you to borrow up to 80 or 90 percent of your equity, and since the loan is secured by your home, you can often get a lower interest rate than you would with a personal loan. But keep in mind that it can take up to two months to get a home equity loan. If you need cash quickly, this won’t be your best option.
• Home Equity Line of Credit: An HELOC is similar to a home equity loan in that it is secured by your home and allows you to borrow against your home equity. However, instead of receiving a lump sum in exchange for fixed monthly payments, you’ll borrow as you need from a revolving line of credit. This can be helpful for home improvement projects. You typically only need to make interest-only payments during the draw period, which could last ten years. A HELOC is a good option if you need to put off repayment, but keep in mind that it comes with variable interest rates and it can take up to two months to access the cash.
• Personal Loan: Personal loans are quick — you can often get approved and receive funds the same day. However, they come with higher interest rates than auto or home equity loans, especially for people with bad credit. Some installment lenders offer no credit check personal loans, which come with higher interest rates than traditional loans but allow you to build your credit with fixed payments over time. Personal loans are also typically unsecured, so you don’t have to worry about losing your property in the case of default.
• Credit Card: If you have excellent credit and can qualify for a zero percent introductory APR credit card, consider whether you’ll be able to pay off the expense within 15 or 18 months. If you can repay the entire balance during the introductory period, you’ll avoid interest altogether. If you’ll need more time for repayment, a personal loan may be a better bet. The average credit card APR is about 15 percent, which is significantly higher than the 10 percent average APR on a personal loan.

Know How Much You Need to Borrow

You should borrow just enough to cover your entire expense. If you’re working on an ongoing project and you’re not sure how much it will cost, consider a revolving line of credit. Personal loans are available in amounts of up to $50,000, but many have minimum borrowing amounts as well. Eliminate lenders that will only let you borrow more than you need or will not let you borrow enough.

Know Your Timeline

Your timeline will impact the type of loan and the lender you choose. It’s not wise to take out a personal loan with a term longer than two years, since interest can pile up and make it difficult to get out of debt. However, you should also choose a monthly payment that will be affordable, which may extend your term. If you have a large expense you’ll need years to pay off, a loan secured against the equity in your home or vehicle will make the most sense.

Prequalify with Online Lenders

Most online lenders will allow you to prequalify for a loan with only a soft credit check, so you can prequalify for as many loans as you want without hurting your credit. However, keep in mind that you’ll only get an estimate, and not your actual rate. Still, prequalifying can be a great way to compare the rates and terms offered by competing lenders.

See What’s Available from Your Bank or Credit Union

If you already have a relationship with a bank or credit union, see what options your institution offers for borrowing. You can sometimes get a rate discount for being an existing customer. However, be sure to compare personal loan rates from your bank or credit union with rates from other lenders.

Compare APRs

The APR of a loan expresses the total cost of borrowing the principal amount. That includes the interest rate, which can range from zero percent for creditworthy borrowers to 199 percent for no credit check loans, as well as any origination or application fees. Choose the loan with the lowest APR to save money on borrowing.

Choose the Right Term

The best term for you will depend on the amount you borrow and the monthly payment that is affordable for you. Use a personal loan calculator to figure out the monthly payments associated with each term option. Choose the highest monthly payment you can still afford to get the shortest possible term and pay the least amount of money in interest.

Avoid Prepayment Penalties

Some lenders charge prepayment penalties to recoup some of the interest lost when you pay off a loan early. That means you’ll need to pay a fee to get out of debt sooner. Since it’s generally a good idea to pay off a loan as quickly as possible, you don’t want to be discouraged from early repayment. Instead, choose a loan with no prepayment fees. This will ensure you can save in the event your income increases.

Formally Apply within a Two-Week Period

You won’t know your exact APR until you formally apply for a loan. Fortunately, the three major credit bureaus treat loan applications within a two-week period as one hard inquiry. That means you can apply for a few different personal loans at once with a minimal hit to your credit. Once you’ve chosen the loan with the lowest APR and the best term for you, you can sign the paperwork and receive your funds.

Consider Automatic Payments

Many lenders offer rate discounts when you sign up for automatic payments. Even if your lender doesn’t incentivize scheduling your payments, you should do so to avoid a late payment on your credit report. Your payment history accounts for 35 percent of your credit score, and even one late payment can result in as much as a 180-point score drop. Just ensure you keep a budget and always have the funds for loan repayment available in your checking account so you don’t incur a nasty overdraft fee.

Set Yourself Up for Success

After you receive the funds to cover your expense, be sure to reevaluate your budget and make room for your monthly payment. If you have other debts, also make at least the minimum payment on each of those debts. If you have income leftover after meeting your basic needs, such as paying for housing and food, devote that money to an extra payment on your highest interest debt. Keep in mind that repaying a loan on-time and in-full will also improve your credit score. While payday lenders and title lenders don’t report your on-time payments to the three major credit bureaus, most personal loan lenders do. As you make your monthly payments and reduce your balance, you’ll see your credit score start to rise. Monitor your progress so you can take advantage of better borrowing options in the future, such as a low-interest personal loan or zero percent APR credit card. And as you pay off your current loan, simultaneously contribute money to an emergency fund each month. This will prevent you from needing to borrow in most situations, so you can keep all the money you earn instead of having to spend it on interest.