How to Compare Bank Rates

It’s very simple to say when looking for loans that the best rate is obviously the lowest rate. That is true in theory but not always in practice. There are other things you need to consider to make an educated decision on what loan will save you the most money in the long run.

Instructions

Determine Your Credit Risk

1. Realize most financial institutions these days use risk-based lending, meaning the loan rate you will get will be based on your credit score, also known as your FICO score. Since this is the case, you may want to order a copy of your score to help you estimate what your loan rates will be.

2. Look at your score when it arrives. If it is above 700, you should qualify for an excellent rate. A score in the 600s will get you a good or average rate. Anything in the 500s or below and you will unfortunately get the highest rate offered if you qualify for the loan at all. You should try to find a cosigner with better credit.

3. Apply for a loan preapproval. Then you will get the exact rate and amount you will qualify for without being committed to taking the loan. However, this option is usually only available for high-dollar loans, like car loans and mortgages.

Compare Loans from Different Lenders

1. Get the rates you are going to compare. The first place a lot of people think of to compare loan rates is a website like bankrate.com. Sure these sites will give you lists of low rates that are being offered, but they are often averages or only for people with perfect credit. It is better to go to the websites of the individual financial institutions you are thinking of using or to make a call to their customer service lines.

2. See if the rate is fixed or variable. Sometimes, lenders will start you off with a low rate and then switch you to a higher one later on in your repayment cycle or if you miss a payment. This is most common on credit cards and lines of credit, but other loans may have this clause too. Always read the fine print.

3. Check the term of the loan. If you get a low rate on a $20,000 loan but only have one month to pay it back, that is not going to work. Make sure the payment schedule is one you can handle even if the rate is a little higher.

4. See if there are prepayment penalties. Some lenders tack these on to make sure they’ll get all of their interest even if you pay off your loan early. Sometimes it can be better to go with a higher rate and pay your loan off quickly than to pay these fees.

5. Write down the pros and cons of each loan on a sheet of paper and compare them side by side. That way you will be sure to pick the best one for you and your situation.

Tips & Warnings

• Check for mistakes on your credit report before you apply for a loan. Correcting errors could give your score a boost.

• Never borrow more than you can afford to repay.

• Once you apply for your loan, make sure to write payment deadlines on your calendar or have the money deducted automatically.

• Don't let a lender try to force you into a loan. Give yourself time to make the right decision.

• Preapprovals will show up as hits on your credit report. Use them judiciously.