How to compare installment loan lenders

Installment loans let you borrow a fixed amount and pay it back slowly over a set repayment period. Installment loans are versatile and come in a variety of types including personal loans, mortgages, auto loans and student loans.

Regardless of the reason for your installment loan, it’s important to compare lenders to ensure you don’t end up in a difficult situation down the road.

How to compare installment loan lenders in 5 steps

After deciding on the exact type of loan you need, the next step is to compare lenders. When you compare lenders, it ensures that you know which offers the most competitive rates, favorable terms and lowest fees for your credit situation.

1. Check your credit report

Your credit report houses all of your credit history, including delinquent payments, hard credit inquiries and your current debt. When you apply for a loan, lenders will conduct a hard credit check in which they look into your credit report to determine your eligibility.

While every lender has different acceptance criteria, checking your credit report is a good indicator of your creditworthiness and overall financial health. While your credit report doesn’t contain your credit score, you should also check that. The higher your score and the lower your debt-to-income ratio (DTI) is, the more likely you are to get approved for an installment loan.

How to check your credit report

There’s an important distinction to make between your credit scores and your reports. Your score is a number based on your credit reports and created using a scoring criteria — like FICO or VantageScore — while each of your credit reports are a summary of your credit history.

You can check your credit report for free weekly by visiting AnnualCreditReport.com. This will give you reports from the top three credit bureaus that lenders use when making application decisions — Experian, Equifax and TransUnion.

If you want to check your credit score, most credit card companies give borrowers unlimited access to their FICO credit score for free as an added perk.

2. Conduct a financial audit

Before taking on more debt of any kind, look at your monthly income and financial obligations. Taking on more than you can realistically afford could put you at risk of falling behind on payments and damaging your credit.

How to conduct a financial audit

The quickest way to find out whether you can afford to take out a loan is to calculate your DTI. Your DTI measures how much of your monthly gross income is put toward debt and is expressed as a percentage.

Most lenders prefer a DTI under 36 percent, but if that’s not possible, aim to keep your DTI under 50 percent. If you pay down your existing debt in full and on time — or early — is a sure-fire way to lower your DTI.

3. Research the lenders’ eligibility criteria

Before you can research lenders’ eligibility criteria, you’ll need to know where to look for installment loans.

Where to find installment loans

Installment loans are offered by nearly every type of financial institution, including online lenders, banks, credit unions and peer-to-peer lenders. However, where you should spend your time looking for lenders may depend on your credit.

Borrowers in good credit health can look to banks and online lenders for the best rates, while those with less-than-ideal credit often turn to credit unions, peer-to-peer lenders and online lenders that specialize in fair credit loans.

What to look for in a lender

Each lender will have different approval requirements — some will require a set income or credit score, while others may not state a specific number and instead require a steady income and good credit score. Check all of the details within the terms and conditions to find the exact requirements and any fees.

Each lender will also offer a different range of interest rates. The most creditworthy borrowers will get the lowest rates and most favorable terms, so keep your credit score in mind when researching. After looking at multiple lenders you’ll be able to get a rough idea of where you might qualify.

4. Compare rates and terms

Whether a lender meets your needs is just as important as the rates offered. Before jumping into applications and prequalifying, finalize exactly what you need when it comes to a repayment timeline.

If you need a flexible repayment structure, look for lenders who allow payment date changes. For a shorter or longer timeline than what’s normally offered, make sure the lender has multiple loan terms to choose from.

Also, investigate the fees each lender charges, including:

• Origination fees: An origination fee is a set percentage — typically between 1 percent and 10 percent — of the original loan amount that is taken out of the amount you receive or added to what you must pay back. Ideally, you want a lender that skips these fees to minimize borrowing costs.
• Prepayment penalties: Lenders charge these fees to discourage borrowers from making more than their set monthly payment and paying the loan off early. If the lender assesses prepayment penalties, you could end up paying more than you’d save on interest.

5. Prequalify

Prequalification allows you to see your predicted eligibility odds and rates without officially applying and with no impact to your credit score. Not every lender offers prequalification, so it’s important to check prior to applying.

Prequalify with at least three of your top lenders. From there you can sift through the list to knock out the lenders who don’t offer competitive rates or those you didn’t get approved with.

If you find that multiple lenders offer similar terms and rates, look for features that set them apart. Some companies offer benefits and perks, like autopay discounts, long grace periods and payment due date flexibility. Research each lender’s potential perks to find the lender that would best benefit you then fully apply.

How to get an installment loan with bad credit

It’s worth boosting your credit score before turning to an installment loan. But if you need the funds as soon as possible, there are several lenders that cater to borrowers with bad credit — at a cost. You can expect higher interest rates and possibly more fees, including higher origination fees.

Some lenders may offer secured installment loans to those with poor credit. These loans are backed by a form of collateral, like a house or car, so the risk is minimized for the lender or company. If you fail to make the monthly payments, the lender has the legal ability to seize your collateral, which makes it even more risky to take on a loan you may not be able to repay.

Alternatives to installment loans

If an installment loan isn’t the best option for you, there are alternatives out there to help you get the funds you need.

• Borrow money from a family member or close friend: Be sure to get the agreement in writing to avoid any confusion. It’s equally important to uphold your end of the bargain to preserve the relationship.
• Get a credit card with a promotional rate: Most credit cards come with steep interest rates that could make your purchases costly. Opt for a card that offers a 0 percent interest rate introductory period to give yourself some breathing room from interest accrual while you pay down your balance.

The bottom line

Whether you’re looking to finance education-related expenses, a big-ticket item or a much-needed home renovation, installment loans can be a great option to make these more affordable. That said, not all installment loans are created equal.

Make sure you assess your credit and finances and compare offers from multiple lenders before deciding on a loan. Doing this will not only help you narrow down your choices but will also help you choose the loan with the best terms and interest rates for your situation.