When you need financing, the wide variety of loan possibilities may seem overwhelming. But with proper research, it’s possible to find the right loan for your needs and budget. So, if you’re looking to finance a purchase in 2023, read on for tips to help you compare options, from terms for conventional personal loans to payday loans and more.
Explore your options
While traditional bank loans might be the first thing you think of when searching for financing options, many other loan types are worth considering. Conventional loans may be the logical choice if you’ve already established a relationship with your bank, but you could consider joining your local credit union to secure a loan. Credit unions may offer better rates because they work to reinvest profits back into their members.
Other unconventional sources, like online lenders, have less overhead, sometimes passing those savings on to their customers. And peer-to-peer (P2P) lending platforms provide a menu of individual lenders with competitive rates and terms.
Consider your credit history
Identifying the right loan type for you includes knowing what you may or may not qualify for based on your credit score. For example, individuals with poor or no credit might start with payday or title loans, which typically have more lenient requirements and less paperwork.
You can apply online for a payday loan and receive your cash the same day. A title loan also offers fast cash but requires collateral (a lien-free vehicle title). And while short-term loans like these are easy to get, they may have quicker repayment terms and higher interest rates and fees.
Borrowers with fair to good credit can qualify for personal loans from a bank, credit union, or online lender with longer repayment terms and generally better interest rates. Depending on your lender, repayment terms can range from a few months to a few years. But keep in mind that the application process can take a bit more time and require more paperwork.
Research interest rates and fees
A loan’s annual percentage rate (APR) determines how much interest you’ll pay on the amount you borrow. A higher APR means the overall cost of your loan might also be more significant. Lenders typically share the range of their loan rates online, so shopping around to compare different options is easy.
APR on loans typically includes interest plus additional fees — like private mortgage insurance and closing costs for a home loan. You’ll also want to look out for hidden fees or prepayment penalties. Lenders may vary the frequency of compounding interest on different loans, so read the fine print to get the most accurate understanding of how much interest you’ll pay in a year.
Calculate the total cost of financing
If you want the big picture of borrowing, it’s important to calculate the total cost of financing based on multiple factors. In addition to interest and the amount you’re financing, the repayment length largely impacts your loan’s total cost.
For example, you may appreciate the lower monthly payments associated with longer repayment terms, but want to consider how much additional interest you’ll pay by extending your loan. Some loans, like car and home loans, may offer lower interest rates for shorter repayment schedules.
Read reviews
You can often learn the most from other people’s experiences. Reviews of lenders by current and former customers can offer an insider’s view of factors like the application process, loan processing times, and the customer service experience. You may even sidestep a negative experience by reading reviews.
The bottom line
With so many loans, terms, and variables associated with financing your next purchase, you may be looking for a little guidance. These tips can help you compare different loan types to find the optimal option for your financial goals.
