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There comes a time in our lovely lives when we need to borrow money. Borrowing money isn’t totally bad. But we have to be smart because signing on the dotted line of a not-so-great loan can have long-term ramifications. Here are tips to help you shop for a loan:
Get to Know Your Credit—Intimately
The first step is understanding where you stand credit wise. Why? Lenders run your credit when deciding to approve you and for what interest rate.
Your credit score is a risk score. It tells people: Does this people pay their bills on time? How likely is it that this person will repay their debt?
If you look risky, lenders charge more to cover the risk. You may want to work on your credit before applying for a loan so you can land the most competitive deal. Check out some tips for improving your credit here.
Figure Out the Monthly Payment You Can Afford
This is HUGE! Lenders will review your credit, income, debt payments, and other financial information to determine if you qualify for a loan.
But, we need to be honest here.
🗣Lending is a business. The deal a lender offers may not be good for you! People become house poor because they buy a home at the very top of their budget. Don’t assume that because a lender approves you, you can afford the payment.
You could get approved for a $2,000 mortgage payment when you’d be better off financially with something around $1,500. Be careful!
Play around with the numbers to see what payment you can afford. If you don’t currently have a household budget, no problem. Put a quick one down on paper. Write your income and write your monthly expenses along with your savings goals.
Now, add in what would be the payment that you’re considering for a personal loan, home loan, or car loan. Use a home loan or car loan calculator if you need help crunching the numbers.
Is the payment manageable? Do you still have some cash left over for emergencies? Will this make your finances really tight?
The next big thing to do when shopping for a loan is comparing prices. You want to know what each lender is charging to do business with them?
- Interest rates
- Application, origination, and processing fees
- Points (this is specific to mortgages; you may be able to buy discount points to decrease your interest rate)
- Closing costs (another big one for mortgages; this may include some the fees above along with appraisal fees, credit report fees, inspection fees, etc.)
- Prepayment penalty fees (this is a fee a lender may charge if you pay the loan off early)
- Fine print (read, read, read for any other misc. fees)
The lender should list out the costs associated with the deal for you to review.
Remember—in all of this YOU’RE the customer. You’re not beholden to one lender. You can prequalify with many different lenders so you can choose the best deal for you.
According to FICO, many different credit inquiries within about a month period is considered
“shopping for rates” and won’t affect your score.
We Have Leverage
As consumers, we forget how much leverage we have. Sometimes when we go to shop for loan products, we think they’re doing us a favor and they have the right to treat us any type of way.
No. That’s not the case.
Go into your meetings with lenders knowing where you stand and what you will and won’t accept. You should expect decent customer service and responsiveness.
You should also demand (respectfully) a clear understanding of the costs and make it known that you’re shopping around with other lenders as well so they have an incentive to negotiate with you.
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