How to Compare Loan Offers

1. Get to Know Loan Terms

Becoming acquainted with key loan terms can give you an advantage when comparing loans from multiple lenders. A few of the most common terms you’ll likely come across include:

• Principal: The loan principal is the original amount of the loan. Over the term of the loan, the principal amount goes down as you make payments.
• Interest: Interest is the cost of borrowing money. It is charged on top of the principal amount. Interest is typically calculated as a percentage of a loan and may be based on your credit score, the amount you’re borrowing, the loan term and other factors.
• APR: The annual percentage rate (APR) is the total annual cost of borrowing money. APR includes the interest rate, lender fees and more depending on the type of loan. Lenders must disclose the APR under the Truth in Lending Act so you know what your loan will cost.
• Credit score: Lenders use credit scores based on one or more of your credit reports, sometimes along with their own proprietary scoring model, to help determine your creditworthiness, or how likely you are to repay your loan. A high score indicates you are a lower-risk borrower, while a low score indicates more risk and could affect your ability to qualify for a loan.
• Loan term: This is the amount of time you have to repay your loan. Your term is outlined in your loan agreement.
• Hard inquiry: Lenders usually make a hard inquiry of your credit when you apply for a loan. Hard inquiries may ding your credit by a few points, but only temporarily.
• Secured loan: A secured loan is backed by collateral. The collateral, like a car or your home, can be repossessed by the lender if you default on the loan.
• Unsecured loan: An unsecured loan is not secured by collateral. Interest rates are typically higher on unsecured loans because they pose more risk to the lender than a secured loan.
• Fixed-rate loan: A fixed-rate loan loan has an interest rate that remains the same over the life of your loan.
• Variable-rate loan: A variable-rate loan comes with an interest rate that can fluctuate over the life of the loan.

2. Gather Multiple Offers

Not all lenders or loans are the same. That’s why seeking out multiple loan offers is so important. Taking the first offer you receive can mean potentially losing out on better rates and terms elsewhere.

Comparing multiple loan offers takes time, but a tool like Experian CreditMatch can save you time (and money) by allowing you to compare several loan offers in one place based on your credit profile—all with a soft inquiry that won’t hurt your credit score.

When it comes time to apply for loans, and also if you are seeking several mortgage preapprovals (which often require a hard inquiry), apply in a short time period to avoid credit score damage. Inquiries made for the same type of loan are considered as a single inquiry by credit scoring models FICO Score and VantageScore^® as long as they are done within 45 days (for FICO) and 14 days (for VantageScore). Because you won’t necessarily know which scoring model is used, it’s best to complete your applications within a two-week period.

3. Understand All of Your Loan’s Fees

Choosing a loan isn’t just about the principal, interest rate and monthly payment. Loans often carry additional fees. With a mortgage loan, you’ll likely pay closing costs, for example. These costs may include application and origination fees, underwriting fees, loan processing fees and more. You may pay some of the same fees with a personal loan, like an application or loan origination fee.

But you may also pay a payment processing fee or prepayment penalty if you pay off your loan early. If you’re late making your payments, you may have to pay a late fee. Some lenders charge fewer fees than others, so comparing loan offers and scrutinizing the loan agreement to understand all the fees you could be charged can help save you money.

4. Fine-Tune Your Options

As you compare loan offers, determine which loans have the best rates and terms with a monthly payment you can afford. Maybe you’re looking for a loan with the lowest possible monthly payment. In that case, you may need a longer loan term, such as a 30-year term versus a 15-year term on a mortgage, for example. Comparing rates on that specific loan term will help you fine-tune which offers will work best. Be aware of how much a loan will cost you over its term, because a longer loan term typically means paying a higher overall cost to borrow.

Beyond interest rate and terms, know your different possible loan options so you can narrow down which will work best for you. With a mortgage, for example, you may be eligible for various government-backed loans that can help you save money.

Also think about what type of lender you’d like to work with. Although a bank may be the first place you consider when comparing loan offers, it’s not your only option. Credit unions and online lenders are also sources for loans with competitive rates and terms. Some lenders have more flexible credit requirements than others, so if your credit needs help, it’s worth exploring all of your options.

5. Take Steps to Qualify

Before comparing loan offers, do all you can to ensure you will qualify.

1. Get a copy of your credit report and check your credit score to see where you stand. If your credit needs work, take time to improve your credit, if possible, before applying.
2. Check out lenders’ minimum credit score, income and employment requirements, along with other criteria. Although you may not qualify with one lender, it doesn’t mean you won’t with another.
3. Consider using a creditworthy cosigner. Because lenders also consider your cosigner’s credit when offering you a loan, you might qualify for the loan and for better rates.

The Bottom Line

You may have many options when comparing loan offers. But understanding loan terminology, knowing all the loan’s fees, taking the steps to qualify for the best rates and terms and gathering multiple offers can help ensure you get the loan that meets your needs.