Why your personal bank may not be the best lending choice
When planning a vacation, most people take time to compare flights, hotel deals, read reviews and conduct other research before they book. Why should you treat researching a personal loan any differently? Yet many borrowers only explore options with their banking institution.
“The best starting point is your bank because they know you, and they can throw terms and rates at you,” says Paul Tarins, president and founder of Sovereign Retirement Solution in Winter Park, Florida. But it’s key to use your bank as exactly that — a starting point. In other words, don’t just automatically go with what your bank offers — use that information as a comparison point to see if you can find a better deal. Often, you can. “Lending institutions are competing for your business,” says Tarins.
Whether it’s another bank in your area or some other type of lender, do a little digging before you commit to a loan. Here are six steps for loan shopping beyond just contacting your own bank:
- Know where you stand
Before you can shop loans, you need to get a sense of your financial situation. “Consumers should obtain a copy of their credit report once per year for free from each of the three credit bureaus to know what’s going on,” says Diedre Davis, vice president of marketing and communications from MSU Federal Credit Union, a university-based credit union that services hundreds of organizations in Michigan. You can do that at AnnualCreditReport.com. That way, you can approach a loan officer knowing what sort of credit you’re working with. “It’s a great way to start a conversation,” Davis says. Obviously, the stronger your credit, the more options and negotiation power you’ll have.
Also, you can get your credit scores for about $20 each at MyFICO.com. Some credit cards also provide scores for free, so check your plastic’s offers as well. On a scale of 300-850, a score of 760 and above is typically considered excellent.
- Consider a credit union
“Banks’ organizational setup is that they are for-profit and have shareholders that run the institution, whereas a credit union is owned by all of its members,” explains Davis. “That sometimes leads to the ability to be more flexible and offer lower fees/rates on loans,” she adds.
- Look online
In addition, some lending companies called peer-to-peer (P2P) lenders are in a position to offer more competitive rates and terms because they pool risk among many borrowers. “They lend money to a lot of people and can share risk, so rates are less expensive,” says Tarins.
If you go this route, just be careful. “There might be an entity posing as a lender, and it might be a scam,” says Davis. She recommends checking with the Better Business Bureau to make sure you’re dealing with a reputable organization. Another thing to look for is contact information, and the ability to call a number and ask questions to a live person, says Tarins.
- Do just the right amount of legwork
“At a minimum, look at three different institutions to make sure you’re comparing apples to apples,” says Davis.
There is such a thing as overshopping, though. Remember, if you start submitting applications all over town, these institutions will keep pulling your credit file, and these hard inquiries could temporarily ding your credit score. “That can potentially send your credit score on a downward trend,” says Tarins. Unfortunately, even a slight drop in credit score can put you into a less favorable category that results in a higher interest rate when you do decide to move forward. The credit bureaus do recognize that similar inquiries in a certain timeframe constitutes shopping around, but the parameters vary.
P2P lenders lend money to a lot of people and can share risk, so rates are less expensive.
Note that FICO doesn’t ding your account for hard pulls for a mortgage, auto or student loan if you find a loan within 30 days.
Your best bet is to look into a few loan options, but only actually put through applications with the one or two lenders who make your short list.
- Compare offers
Be sure you consider all factors including interest rate, terms, origination costs, promotional periods and fees. “Be diligent in knowing what you’re looking at, and don’t be afraid to take an offer to another institution and ask them to tell you how they compare,” says Davis.
- Start a lender relationship
Once you decide which lending institution has the best offer for your needs, schedule a call or make an in-person appointment to go over any lingering questions. “Let the institution know the purpose of the money so they can guide you as to what the best option might be,” says Davis. For instance, she explains, you might think you need a personal loan, but what you really need is $2,000 to take a trip to see your sick grandma, and you can tap into another solution, such as pulling equity out of an automobile you paid for. Having open conversations can help you choose the best loan for you.
When considering a loan, banks do have great products for very specific types of borrowers, says Tarins. “If you fit into that box, you can get a great deal,” he says. If not, exploring other options might just offer you a better payoff.