Whatever type of loan you apply for, it makes sense to lay the groundwork first.
Prepare to rate shop
Order a copy of your credit report and check it for accuracy. If you see any mistakes, such as an account that does not belong to you, you can file a dispute. The condition of your credit report is essential, because the higher your credit score, the lower the interest rate you are offered. If your credit is low, there may be steps you can take to increase your score.
Gather your documents. Lenders ask to see proof of income and assets. They also want to know who you owe money to and how much you owe. Have recent pay stubs, bank statements, and tax returns for the past three years available.
Compare apples to apples
If you find the assortment of percentage rates, fees, and numbers dizzying, you're not alone. From the outside, rate shopping can seem confusing. It's not really, though -- follow these three steps, and you will be on the road to the best loan possible.
Request quotes from at least five lenders, including your personal bank or credit union. You can always check more than five lenders, as long as you do it within the recommended 14-day window.
- Forget about interest rates -- focus instead on APR. APR stands for annual percentage rate, and it's the amount you will pay, including interest, origination fees, discount points, and any other fees to finance the loan.
- Check repayment options. The number of months you have to repay a personal loan typically ranges from 12 to 72 months. You may be able to get a lower monthly payment by stretching the loan over a longer term, but this also means you pay more in total. Look at the repayment options for each loan side-by-side in order to determine which best suits your needs.
Once you've decided on the best loan for you, do not make any significant life changes until you've finalized the deal. Don't change jobs, take out new debt, or go on a shopping spree. Lenders typically do one final check of your credit shortly before closing, and if your credit score or income level have fallen, they might withdraw the offer or require a higher APR.
Taking the time to find the best APR can save real money, funds that may allow you to build up an emergency fund, invest for retirement, or even start your own business.
Let's return to the home-buying example, and imagine the following:
Scenario A: You take your real estate agent's advice, and use the lender he or she suggested. You take out a $250,000 mortgage for 30 years. The lender offers an APR of 5.99%, including origination fees, broker fees, and other miscellaneous charges. Your monthly principal and interest payments are $1,497, and you will pay a total of $288,920 in interest over the life of the loan.
Scenario B: You rate shop and find a lender offering an APR of 5.25%. While the APR does not seem dramatically different, running the numbers tells you that your monthly payment will be $1,381, and you will pay $247,160 in interest over the life of the loan with the same 20% down payment and 30-year term. Rate shopping just saved you $116 per month, and a total of $41,760 in interest.
Rate shopping is the best way to separate legitimate interest rates from promotional garbage that isn't what it first appears. Whether you're looking for a mortgage, personal loan, auto loan, or new credit card, rate shopping ensures that you have done everything you can to get the best deal. Even if you genuinely dislike shopping, looking out for yourself is just smart.
RELATED: Need to start saving? Check out Motley Fool Money's guide to the best savings accounts.
