Since most of us will need to apply for a loan at some point in our lives--whether it be for a car, a home or an education--it's vital to understand how lending works at a bank or a credit union.
Do you know the difference between a secured and unsecured loan? Or a fixed rate versus a variable one? You don't have to know a different language to be able to get a loan, but understanding certain terms will help you feel more confident when the time comes to apply for one.
Not sure where to start? The five tips below will help you shop smarter for the loan that’s right for you.
Reading the fine print isn’t fun, researching loan options isn’t exactly exciting and asking financial questions can feel intimidating—but these all play an important part in helping you find the right loan product. If you’re tempted to rush through the process, just remind yourself that being thorough now can save years of financial stress down the road. You should never feel pressured to sign anything on the spot. Remember that this is your loan and your future—you’re in control!
In order to choose the right loan, you need to have a clear idea of how much you can comfortably afford to borrow. Spend some quality time with your budget—if you don’t have one, now is a great time to make one. You’ll want to come up with a range, so calculate a few different scenarios:
Picturing your loan payment alongside your other budget items will give you a sense of what you can realistically afford so that you can confidently shop for a loan without worrying about the financial effect on your lifestyle.
Your credit score plays a huge role in determining your loan rate. Additionally, knowing your credit score before you go loan shopping will save you some time by making it easy to weed out offers you’re not eligible for. In the meantime, keep up good credit habits: pay your bills in full and on time, and try to use only 10% of your available credit limit each month.
Brush up on some basic loan terminology and then move on to learning about different types of loans, such as secured loans, unsecured loans, fixed-rate loans and variable-rate loans. Get an idea of the interest rates for the products you want. When comparing various loans, look at more than just the Annual Percentage Rate (APR). Consider the fees, the payment schedules, the eligibility requirements, and the application and approval process. Also, check out the history and reputation of the various lenders—especially if you stumble upon offers that seem too good to be true.
Credit unions are known for offering competitive rates on loans. You may also qualify for discounts based on your existing membership or because you have other banking products with your credit union. Once you’ve done your research and you know your budget inside and out, it’s time to meet with a loan officer. Don’t be shy—ask about any wording you don’t understand. Ask for your lender’s opinion and see if they’ve worked with someone in a similar situation as yours. To really put your loan in context, ask a variety of questions, such as:
The most important thing to remember is that taking out and repaying a loan is not intended to be a stressful experience—it’s intended to make large purchases or investments affordable for you. It’s easy to get sucked into horror stories about things like foreclosures and student debt, but a little knowledge and preparation will make your own loan story a lot happier and a lot less dramatic. So study up, focus on your specific needs and ask around—your perfect loan is out there!