Choosing the Right Loan and the Right Lender
Borrowers have lots of choices among types of loans and lenders. Choosing wisely can save you a lot of money. Protect yourself from paying more for credit than you need to by understanding the different types of loans and lenders. Remember, if you borrow money that you cannot repay, you can lose your home, your car, your savings and your investments. Also, a court can order that your employer “garnish” your earnings, that is, withhold some of your pay on behalf of a creditor.
For some loans, called “secure loans,” you must put up “collateral” – something you own that the lender can take if you don’t repay the loan. Cars, homes and savings and investment accounts are common types of collateral. “Unsecured” loan, like credit cards, do not require collateral.
The main types of loans are:
- Credit cards: An unsecured loan, credit cards are the best choice for clothing, small appliances and other small purchases from department stores.
- Consumer installment loans: Unsecured loans, these are used to finance larger purchases like college tuition, vacations, home improvements and major appliances and to consolidate debts. They usually must be repaid over two to five years.
- Home loans (purchase, refinance and equity): Secured loans, these are used to buy a home, obtain a new mortgage that costs less or use some of the equity to pay for other major expenses.
Regardless of whether it’s a secured or unsecured loan, lenders charge both fees and a percentage rate of interest to earn a profit on the money they lend. Before you apply for any type of loan, make sure you know what fees and interest rate will be charged and all the other conditions the lender places on your loan. Those conditions include, but are not limited to:
- The loan term (how long you have to repay the loan amount, called the “principal,” plus the interest and fees)
- The amount and timing of payments
- What will happen if you make payments late or miss payments
- Whether you can repay the loan without penalty before the loan term is up
A loan’s interest rate is expressed as a percentage of the loan amount and may be “fixed” or “variable/adjustable.” A fixed rate stays the same over the term or “life” of the loan. A variable/adjustable rate may go up and result in a higher interest rate and monthly payment. To see what different loans will cost, compare their “annual percentage rates” (APRs), which include both the interest rates and fees.
The amount of money you borrow is called the “principal.” When you repay a loan, you repay the principal plus all the interest and fees that are charged. Before you take out a loan, determine how much money you will be required to repay the lender over the life of the loan. The difference between the principal and the total of all your payments is the “cost” of the loan. Be sure you know and can afford the cost of any loan before you sign a contract with the lender.
Federally insured banks, savings and loans and credit unions are usually the best place to shop for an affordable loan. Some have special programs to help low-income applicants and applicants with poor or no credit histories.
Other types of lenders also offer many kinds of loans. Just remember that the easier it is for you to qualify, the more expensive the loan is likely to be.