How to Compare Loan Rates

Shopping around for a loan is not like shopping for consumer goods, but it's just as important, if not more so, to get a good deal. Those who are taking out loans and incurring debt really need to look at the agreements that they sign to make sure they are not getting into a situation that they don't understand or can't afford. To compare loan rates, take a look at what's available in your area and make informed decisions about the types of loan agreements in which you participate.

Steps

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    Consider fixed versus adjustable interest rates for a loan. Financial experts report that many lenders in recent years have pushed adjustable interest rates without really telling people what they are. A borrower should know whether their loan includes a fixed or adjustable interest rate.
    • Understand the benefits and disadvantages of adjustable interest rates. With a fixed interest rate, the borrower knows what interest they will pay on a loan over the entire term of the loan. On the other hand, an adjustable interest rate can change along with the prime lending rate. This can have positive results if the national interest rate goes down. However, it can cause a financial crisis for a borrower if the interest rate goes up.
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    Assess the annual percentage rate, or APR, for a loan. The APR takes into account various other kinds of lending fees along with the basic interest rate to provide the borrower with a total interest obligation annually.
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    Always shop around for loan interest rates. Make sure that the lenders you are talking to are offering the lowest interest rates possible, relevant to market rates and other aspects like your credit score.
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    Ask about locking in rates. Many homeowners getting mortgages and others who are looking for other conventional loans will attempt to lock in a specific interest rate at some point in the agreement. Locking interest rates means that if the rates change between the time of the locking and the settlement of the deal, the effective interest rate for that particular loan will not change.
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    Evaluate troublesome loan clauses. While government programs insure conventional loans with a fixed interest rate, some private lenders offer exotic loan products that include dramatic changes in interest rates over time. Financial journalists have reported on the dangers of these kinds of subprime loans. Educate yourself on what to avoid in order to prevent a foreclosure or similar situation.
    • Look out for teaser rates. In many cases, the lender offers a low, up-front interest rate that is scheduled to jump several percent after one or two years, according to the loan agreement. This is where the borrower needs to read his loan agreement carefully and identify these improper changes.
    • Avoid balloon payments and similar setups in a loan agreement. Balloon payment loans were originally made for borrowers with uneven income who expected windfalls, large bonuses or other financial payments later in a tax year or after the initial few months or years of a loan. The balloon payment setup allows the borrower to pay a lower monthly payment up until the balloon payment kicks in, where a much larger single payment applies. For the conventional borrower, this is a bad deal, since wage earners and others structure their payments around steady income.

Article Info

Categories: Mortgages and Loans