Why Is It Important to Compare Loan Offers?
If you intend to take out any kind of loan to fund personal or business projects, it is wise to not grab the first offer that you get. Instead, spend enough time doing loan shopping and loan cost comparison. This will increase your chances of getting the best financing deals.
Ideally, loan shopping is done between 14 to 45 days. Referred to as the “loan shopping window”, this period allows you to make inquiries without your multiple credit inquiries being recorded and negatively affecting your credit score.
Comparing loan offers are beneficial for several reasons:
You’ll have a better idea of the current loan rates
The finance industry is very competitive. To attract and retain customers, various lenders offer affordable interest rates and minimal or no associated loan fees. If you don’t spend enough time asking from several lenders about various financing programs and comparing the estimated total cost of each loan structure, you might miss out on the best deal.
You can factor in the associated fees in the computation
Some lenders charge hidden fees for discounted loan offers, which seem to be super deals if you don’t add to the equation the various associated charges. These hidden loan fees, such as precomputed interest, cost of ownership, document fee, origination fee, prepayment penalty, and refinancing and exit fees--can be heavy on the pocket and can significantly affect the total cost of the loan.
With loan shopping, however, you can sit in with each prospective lender and discuss their product offerings. This will give you the chance to ask about the terms of the loans you’re planning to get, as well as the charges that you’ll likely incur.
By knowing the associated loan fees, you can have a better estimate of its actual cost. This will help you better compare offers and identify the real financing program with the best deal.
You’ll likely be offered a better deal
If lenders find out that you’ve been asking around for loan offers from their competitors, they are likely to offer their loan products at lower rates to convince you to choose them over their competitors. Some may even provide perks, like zero down payment and annual fees just to get you on their clients’ list.
The competition among lenders put you in a stronger position to negotiate for better deals, especially if you have a good credit score and a stable source of income.
You can explore various loan options
Loan shopping allows you to discover loan products that you’re not familiar with but may be ideal for your needs and financial circumstance that the one you initially planned to get.
For instance, you want to get a business loan but find it hard to get approved because of low capital. You chance upon a lender that promises to approve your business financing application in exchange for a higher interest rate. Not convinced, you continue searching for better deals and finally stumble upon a microloan. This small, short-term loan enables you to borrow $20,000 that you can use as working capital or for inventory purchase.
How to Compare Loan Offers
It is not complicated to compare various loan offers if you know what to look for. These include the:
This amount charged to you by the lender on top of the principal amount that you borrowed can range from 2% to 40% of the total loan amount, depending on the type of loan you borrowed and your credit score. Typically, it is paid throughout the life of your loan at a regular frequency of monthly, fortnightly, or whatever the agreed schedule is. Over the course of your loan, the interest can add up to tens of thousands of dollars.
Because of the immense effect of interest rate on your loan, it is one of the most significant factors that you should look into when comparing loan offers.
Some lenders sneakily offer lower interest rates for long-term loans to make them seem affordable. Do note, however, that the longer the term of your loan, the more you will be paying in interest. It is in your best interest to pay loans in a short time to avoid getting upside-down (when the item you finance loses value faster than your loan balance decreases).
Annual Percentage Rate (APR)
When comparing loans with different terms, use the APR instead of the interest rate.
The APR is your loan’s interest rate for a whole year expressed as a percentage. It includes not just the monthly interest rate, but also the up-front fees and any other costs associated with your loan. It offers a clearer picture of your loan's true cost.
Banks and fintechs use APRs when offering to compare financial products. Demand for an APR when a lending company does not present you with one.
These are the fees that lenders charge you for funding and processing the loan. Depending on each lender, expect to pay closing costs between 1%-6% of the loan amount.
Loans with low-interest rates often may not include the closing costs so always ask your lender for these details.
Closing costs that are charged by lenders usually include:
- Loan Origination Fee, for processing your loan
- Credit Report Fee, for ordering your credit report
- Underwriting Fee, for preparing all your documents
- Appraisal Fee for secured loans; paid to a professional appraiser who checks’ your property’s value
- Title Search for mortgage loans; paid to a third-party company that ensures there are no liens or taxes owed on the home
- Home Inspection Fee in home loans
- Surveyor Fee in home loans; paid to a professional surveyor who ensures that your property has accurate boundary measurements
Pro Tip: The best loans don’t necessarily have the lowest APR
Always consider both APR and closing costs when calculating and comparing loan offers.
While the APR offers a good estimate of the total cost of a loan, it may not include the closing costs that come with it. Lenders usually exclude the closing costs from the calculation of APR to make the latter seem low.
Looking for a loan with the most favourable terms for you? Reach out to us at Positive Lending Solutions. We are an award-winning finance broking firm with access to the largest and oldest banks, as well as the most promising fintechs in Australia.