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Before interest rates change, people may consider getting a loan for a major purchase, home repairs, or pay off high-interest debt. BBB recommends thinking it through and doing the right research with the following tips:
Check your credit score. Different lenders have different credit score requirements for issuing loans. Before applying, see what yours is first. Using a credit card will improve your credit score if it's used responsibly. This means making small purchases that are easily paid off at the end of the month. Keep in mind that every time you apply for a loan, a record is noted on your credit score. Lenders checking your credit score can see if you have multiple loan applications, which may give the impression that you are unreliable.
Research the lender. Look at the annual percentage rates (APR) and the total amount repayable (TAR) from each lender that is considered. Ask about the monthly payment and see how adjusting the length and amount of the loan can change the payment. Also, ask if it is a fixed or variable rate loan. Make sure you understand all potential fees, including if there is a fee for early repayment of the loan. Find out if you are able to refinance the loan if rates change. Research lenders on BBB.org to read reviews and complaints as well as consult with family and friends.
Consider a fixed rate loan. A fixed rate loan means the lender will not raise the interest rate throughout the life of the loan. When the rate is locked, the borrower is protected against fluctuations in the economy when most lenders typically raise interest rates. If the interest rates decrease below the fixed interest rate, ask the lender if you're able to refinance as an option to pay a lower interest rate.
Know your budget. Only take out a loan for as much as you need, even if the lender is offering to loan more. Borrowing more money than you need may lead to overwhelming debt in the future. Analyze your budget and calculate the monthly payments you will be able to afford. Do not take out a loan for more than you can afford. Avoid taking out multiple loans.
Pay off the loan early. If you are able to, pay off the loan early. Paying in a shorter period of time means you'll clear the debt, increase your credit score and decrease the amount of interest paid over time. If the lender charges a fee for early payment, calculate if the savings in interest makes up for the fee.
Carefully read and understand the contract. Before signing the contract, it is crucial to read and fully understand the document. Ask questions and make certain that you understand all the details of the loan including costs, charges and fees, and the terms and conditions. Do not sign a contract with any blank sections.
Avoid any lender who:
- Encourages you to inflate your income on the loan application.
- Tempts you to apply for more money than needed.
- Sells you into a higher monthly payment that cannot be afforded.
- Pressures you into signing documents you haven't read or you don't understand.
- Doesn't disclose the APR terms, length of repayment, or cites a different/higher APR than what was promised.
- Promises one set of terms verbally and gives a different set of terms in the contract with no legitimate explanation for the change.
- Forcefully tells you to sign blank forms that they promise to fill in later.
- Witholds copies of the documents with your signature and does not provide copies.
- Asks for signatures on a loan that includes credit insurance or other extra products you didn't want.
- Requests an upfront fee prior to obtaining the loan.
- Promises a loan regardless of prior credit problems.
- Asks for a wire transfer or payment to an individual instead of a business.
Promises of reduced debt, low-interest loans and magical fixes to your credit score that arrive in the mailbox or email box are tempting. Be aware of the difference and know which is the best solution to get out of debt. Check BBB.org first.
Last reviewed: Wednesday, April 14, 2022