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    by Clark Kendall Personal Finance Expert

    If you want to buy a car, house or business or consolidate debt, the right lender helps you achieve your financial goals. Use our guide to research the best loan company for you. We explain how to evaluate your options before signing any paperwork to make sure the loan company you choose to work with will help you improve your financial situation.

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    Types of loans

    Car loans

    Auto loans are available for both new and used cars, and consumers can obtain car loans from banks and credit unions as well as most auto dealers.

    Home loans

    Home loans, or mortgages, are available to help people finance their homes. Conventional mortgages usually require the borrower to have a down payment for 20 percent of the purchase price.

    Home equity loans

    If you own a home, you might be able to take cash out of your home with a home equity loan to finance a remodel or fund another major purchase.

    FHA loans

    Many private lenders work with the Federal Housing Authority to offer FHA mortgages. These loans require a much smaller down payment than conventional loans.

    VA loans

    Armed service veterans, current service members and their spouses may qualify for a Veterans Affairs (VA) mortgage. These home loans have a very low down payment, and borrowers aren’t required to purchase mortgage insurance.

    Student loans

    Those who want to attend college can take out a student loan to help cover the cost. The two types of student loans available are federal and private.

    Debt consolidation loans

    Debt consolidation loans are used to help people manage their debt. Multiple loans are combined into one loan with a single monthly payment, usually with a lower interest rate.

    Business loans

    Those wishing to open a business or expand their current business can take out loans to finance their ventures.

    Secured vs. unsecured loans

    Secured loans

    Secured loans rely on an asset (such as a car, a home or a boat) that will be used as collateral for the loan.

    Unsecured loans

    Unsecured loans are more difficult to qualify for and have higher interest rates because an asset for collateral is not required. These are sometimes called personal loans.

    How to choose a loan company

    Loan fees and costs

    When you take out a loan, chances are you’re thinking more about the cost of the item you’ll purchase with the loan money than about the cost of the loan itself. If you don’t consider the loan cost, that item could end up costing much more than you expect. To ensure that you get the best deal on a loan, make sure you talk to your loan company and understand all fees associated with it and how interest will accumulate.

    • Interest rate: The interest rate is the money a lender charges you when you borrow money and is a percentage of the total amount borrowed. Your credit score will influence the interest rate a lender charges, because they will charge people deemed higher risk a higher rate. If your loan doesn’t have pre-payment penalties or precomputed interest, you’ll save money on interest by paying your loan off early.
    • APR: The Annual Percentage Rate (APR) is often confused with the interest rate; however, the APR actually accounts for the total cost of the loan, including any one-time fees. When comparing loan offers, look at the APR to get the best price comparison.
    • Origination fee: The origination, or processing, fee, is a one-time charge that covers the cost of processing a loan. This fee is typically included in the overall loan amount, so you aren’t required to pay it up front.
    • Pre-payment penalties: Some loan companies charge a fee if you pay off your loan early. These fees help the lender make up the money they lose in interest, but they also prevent people from getting out of debt early when they’re able to.
    • Precomputed interest: Loans with a precomputed interest rate use the original amount instead of the outstanding balance to determine the amount of interest a consumer will pay each billing cycle. This method means your payments may get smaller as time passes. However, if you pay the loan off early, you won’t save any money on interest.
    • Late payment fees: Most lenders will charge a fee if you pay your bill late. Avoid that fee by setting up autopay from your bank account or just put a reminder on your calendar to keep you on track.
    • Payment processing fees: Some lenders charge a fee to pay your bill in a certain way. For example, some lenders may charge a small fee if you pay your bill by phone or using a check instead of setting up automatic electronic withdrawals. Make sure you understand these fees and choose a lender that allows you to make your payment in the way you want for free.

    Trustworthiness of the lender

    When working with a lender, you should choose someone you feel comfortable with and who is trustworthy. In general, if you’re taking out a mortgage or auto loan from a well-established bank or credit union, you can feel confident in the lender’s credibility. If you’re working with an online loan company or new business, make sure to fully research the company to avoid being scammed. Scams may be most likely to occur with unsecured, personal loans.

    • Hold loans vs. flip loans: Determine whether the lender you’re working with will hold the loan after you close or if they’ll flip, or sell, it to another party. While lenders who flip loans aren’t more or less trustworthy than those who don’t, you’ll have to simply accept that the company they sell your loan to will be trustworthy and offer good customer service.
    • Customer service: Consider how easy it is to get in touch with your lender now to determine if they’ll be easy to reach later if you have any problems. Also consider how patient they are in answering your questions. They should be willing to address all your concerns and explain anything you’re confused about.
    • Registered: Lenders must be registered to do business with the appropriate authority, usually the department of banking or consumer credit, in every state in which they do business. You can find a list of state licensing authorities on the Nationwide Mortgage Licensing System & Registry website.

    Mortgage broker vs. loan officer

    When taking out a loan, you’ll have the choice to work with either a mortgage broker or a loan officer. There are perks to each one, so it is important to know the difference.

    • Loan officer: Loan officers work for the bank or lender, so getting a loan through them may be faster than working with a mortgage broker. These individuals are primarily accountable to their employer, so they may not always make recommendations that are best for you.
    • Mortgage broker: Mortgage brokers are a kind of middle-man between those seeking loans and multiple lenders. If you’re worried that your credit may make it difficult to get a loan, consider working with a broker because they can help you decide which lender is most likely to approve you. These individuals may also be able to help you find a better interest rate because they’ll be comparing multiple lenders.

    Other considerations

    There are a variety of other factors to consider when borrowing money. If at any point during the process you’re confused, make sure to discuss the matter with your lender.

    • Expertise: Look for a loan company that specializes in the type of loans you’re considering. If you’re working with a big bank, ask whether they have loan officers who specialize in certain types of loans.
    • Credit report: All consumers are entitled to get one free report from each credit reporting company every year. If you’re considering taking out a loan, request one of your credit reports as far in advance as possible to make sure no inaccurate information appears on it. Many credit cards show you your credit score for free; knowing your credit score may help you decide whether to work with a loan officer or mortgage broker.
    • Down payment: If you’re taking out a mortgage or car loan, consider how much of a down payment you’re able to make. The larger your down payment, the less money you’ll need to borrow. Saving a little longer to have a larger down payment could save you a significant amount of interest later.
    • Special programs: Many homebuyers qualify for special program loans, like FHA or VA loans, for example. Research these options to determine whether you qualify for any special programs before taking out a loan.
    • Private mortgage insurance: Individuals who qualify for a mortgage but do not have a down payment that accounts for 20 percent of the home’s value may be required to purchase private mortgage insurance (PMI), which will allow the lender to recover money if the borrower defaults on the loan. This insurance does not offer any protection to borrowers. PMI is usually between .5 and 1 percent of the total amount of the loan.

    Loan companies FAQ

    How do I know if a loan company is legitimate?
    A legitimate lender is easy to reach, has a solid online reputation and offers you complete loan terms before you sign anything. It will also check your credit history to ensure that you can pay back the loan.

    There are a few warning signs of scams. You should avoid loan companies that:

    • Ask for advance payments
    • Rush you into making a decision
    • Have numerous consumer complaints
    • Don’t go over loan terms in detail
    How do you get approved for a loan?
    To get approved for a loan, you need to:
    • Apply with your lender in person, over the phone or online
    • Have a decent credit history
    • Have proof of a stable income
    • Have a reasonable debt-to-income ratio

    Some lenders offer instant approval, while others may take several weeks to issue an approval. It's possible your lender might require collateral.

    What is a loan registration fee?
    A loan registration fee is a one-time fee that your lender charges to process your loan application. Loan registration fees are usually 1% to 8% of the loan amount. However, this varies depending on the type of loan and your chosen lender.
    Do loan companies check your bank account?
    Before issuing a loan, some lenders may want to see your bank statements to confirm your financial details, but this isn’t always the case. Ask your lender if it requires bank statements before it issues a loan.
    Do loan companies ask for money upfront?
    Legitimate lenders do not ask for money upfront. Any fees are automatically added to the loan amount, so you should never agree to make any payments upfront.
    How do loan companies make money?
    Loan companies make money on the interest charged on loans. Part of their profit is the difference between the money charged to borrowers and the money the loan company owes to depositors and investors.

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      by Clark Kendall Personal Finance Expert

      Clark Kendall has over 30 years of domestic and international investment and wealth management experience, focused on serving Middle-Class Millionaires. He is a Chartered Financial Analyst (CFA), Accredited Estate Planner (AEP) and Certified Financial Planner (CFP). He is the president and CEO of Kendall Capital in Washington, D.C., and a member of the Washington Society of Chartered Financial Analysts.

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