Whether it’s a mortgage loan, student loan, personal loan, auto loan, small business loan, or any of the many other loans – it’s likely that an individual will need some sort of loan during their lifetime.
Like all money moves, it’s important to make these decisions as carefully as possible. Never skimp on your due diligence when getting involved with a lender.
Mortgage Loans
Currently 63% of homeowners in the United States have mortgages. If you are applying for a mortgage loan, be sure to learn everything you can about the types, their pros and cons, and your personal eligibility before making a decision. It is a lot to learn, but it’s absolutely worth it. A housing counselor can be an invaluable resource to you when making this decision. This blog only scrapes the surface of the information available and is intended to point you in the right direction as far as resources are concerned. Consumer Finance has a thorough guide to understanding mortgage loans and links to additional resources.
There are three main types of mortgage loans, with subtypes under each category.
Conventional loans are not part of a government program. The two main categories are conforming loans and non-conforming loans. Both of these categories are subject to change based on county. (Pro tip: always consult with multiple lenders before choosing a non-conforming loan, and never make a decision without getting your official loan estimates. Many of the loans that got people in trouble in the 2008 housing crisis fell under the “non-conforming (other)” category.)
FHA (Federal Housing Administration) loans come from private lenders, but are insured and regulated by the FHA, a government agency. These loans may be the cheapest option for someone with a lower credit score and a small down payment.
Special Program loans vary state-to-state and by an individual’s circumstances. Examples of these loans are VA loans, loans for school teachers, firefighters, and other public service employees, first-time homeowners, and rural development loans, among others. This tool can help you search special program loans in your area.
Personal Loans
Personal loans are just that: personal. Some people use them to pay for weddings, home improvement, or debt consolidation. Personal loans are sometimes a better choice than maxing out a credit card for a big purchase. The typical personal loan does not require collateral. These are more straightforward than mortgage loans, but far from simple. Not every loan is created equally, so do your homework! Some have downright outrageous fine-print such as a prepayment penalty – you get dinged if you pay your loan off early. Yeah. Be sure to know the ins-and-outs before signing anything! If possible, get pre-qualified (not pre-approved) by at least three lenders so you have a good idea of what’s available to you. Pop over to read Next Advisor’s Do’s and Don’ts for a crash course in personal loan best practices.
Auto Loans
Unless you live in a dense metropolitan area, it’s hard to not have a car in the United States. Don’t wait until you’re in the dealership negotiating rates (known in the industry as “the box”) before you think through your loan. For instance, you might talk the dealer into taking $2,000 off the sticker price – but if you then opt for a longer-term loan and longer payments, you may end up paying an additional $3-4,000 in interest when it’s all said and done.
Always know your credit score before applying for a loan. You can get a free annual credit report from Credit Karma. A lot of times dealerships will advertise really low interest rates for vehicles, but those are only available for people with credit scores over 750. If your score is on the low side, definitely take the time to shop around to see the rates different lenders will offer you. Never take the first loan offered to you. (A potential exception being for those with *impeccable* credit getting a loan at the dealership.)
There are two main advantages to choosing the shortest-term loan you can swing: 1. Longer-term loans lower the monthly payment, but extend the time you’re paying interest, leading to you paying more over time, and 2. dealers will often use these lower monthly payments to talk you into buying a more expensive car than you need. If possible, pay off your taxes and fees upfront in cash. Here are more tips for getting the best car loan.