Choosing a reliable financial institution is one of the hardest decisions in an investment. Choosing a financial institution that provides a range of accounts for your profile is the best way to go. Decide whether you want a bank, private financial institution or online lenders and consider reviewing their monthly interest charges, overdraft and ATM charges. Evaluate yourself and gather all the necessary documentations required during the loan application process to avoid inconveniences. Lenders vary in determining your borrowing power and may some may ask you a lot of personal questions. In this article, we are going to discuss the various tips for choosing a lender and what lenders look for in a borrower.
How Do I Choose a Favorable Lending Institution?
Here are a few tips to consider when choosing a lending institution.
1. Identify the bank account to open
Deciding on the type of account you want is key, whether you are looking forward to saving or opening a basic account. The following are types of accounts available:
- Savings account: This is an account meant for money that you are saving towards achieving a certain goal. For example, you might be saving for a trip, building a home or maybe an emergency fund.
- Lock savings account: This is a type of account where your money is locked in for a certain period of time depending on your preference. This is done when you are not in urgent need of the money.
- Checking account: This is an account where you save money that you will be spending on a regular basis.
This may not be the most reliable way of identifying the bank you want but there are more ways as discussed below.
2. Consider their interest rates
This fully depends on whether you take much considerations into interest rates. A checking account doesn’t pay interest but saving and lock savings accounts do. If you take interest rates into much consideration, the consider an institution with aggressive interest rates.
3. Consider low-fee institutions
Opening a bank account comes with monthly fees and you might want to consider the following from banks:
- No fees: Look for a bank that does not charge monthly maintenance fees
- Low fees: Since most banks charge monthly fees, it is best to look for a bank that charges low monthly service fees.
- Fees you can relinquish: You may opt to waive the monthly charges by retaining the minimum balance as agreed with the bank.
- Transaction fees: On a normal occasion, you are allowed to withdraw 6 times a month. Going beyond 6 times attracts a penalty and it is important to find out how much the penalty amount is.
- Overdraft fees: If you are worried about over drafting your account, you may want to set an overdraft protection which many banks charge a small fee for.
4. Decide between an online lender or physically located banks
The preferences of each borrower differ from one to the other. Some may opt for online lenders which charge low fees and high interest rates while some may choose physically located banks who charge averagely fair interest rates.
5. Compare banks, credit unions and online platforms
Below are the definitions of a bank, credit union and online lenders:
- Bank: A bank has physical locations which uses new technology and has more locations. They offer services such as banking, credit and debit cards.
- Credit union: A credit union has special customer services but tend to charge higher interest rates on loans.
- Online banking platforms: Online platforms partner with banks to offer borrowers with insurance that comes with extra charges such as high interest rates.
6. Bank accessibility
Physically located banks are easily accessible since they may have branches or ATMs in your location, making it easier to access money. If you travel a lot, consider a bank with a good network of branches so money can be accessible no matter your location. Online lending platforms may also have ATMs near your location and if accessible, they are a good option as well because they are free.
7. Read through the agreement
It is important to check whether your choice of bank is insured or permitted by the law to run banking services to ensure safety of your money. Credit unions are licensed by the National Credit Union Administration while banks are licensed by the Federal Deposit Insurance Corporation. Go through the agreement and note the applicable fees and terms of agreement.
8. Check other services offered
There are other services offered by banks that might meet your standards apart from a loan. They include: mortgages and home loans, credit and debit cards, other loans such as personal loans, investment accounts and financial planning services.
What Do Banks Look for In a Borrower’s Loan Application?
The same way a borrower has preferences on the type of bank to choose, banks and other lending institutions also have considerations. The following are the factors considered by banks as discussed below:
- A borrower’s income
Presenting a number of pay slips as proof of income will affect the amount of money you can borrow positively. Extra costs such as bonuses and commissions are awarded differently by various banks. For self-employed individuals, banks require the most recent tax returns to assure them of sustainable income.
2. Savings
Having a good savings history paints a good image of you to the lender because it shows them you have the capability to manage your money. Additionally, the more the savings in your account, the lesser the amount you borrow to finance your projects.
3. Your credit scores
A credit score highlights your credit usage and repayment habits which at some point may limit the available options if not satisfactory. Defaulting previous loans, court cases and credit with other lenders can cause the lender to decline your application. A credit score higher than 60%assure the lender that you are a reliable customer. To improve your credit score, ensure you pay your bills on time, and make extra repayments on your existing loans.
4. Assets and liabilities
Assets such as cars and properties and liabilities such as credit cards are also determinant on the amount of loan you can borrow. The limit on your credit cards is the one considered and therefore you can dispose the ones you are not using.
5. Spending habits
Overspending and late repayments on loans can cause a lender to decline your application. They will assess your spending, bank and credit statements for the previous six months to look for payments that might indicate debts. If you happen to spend lesser than you earn, then your application is likely to be approved.
6. Down payment
The loan to value ratio is determined by your income and by how much deposit you lay down. Lower rates often range from 80% of the property’s value and may rise up to 95% or even more depending on the impression the lender gets about you.
7. Employment history
Lenders tend to prefer a consistent employment history to measure to ability to make repayments. Working in the same job for a number of years signals the lender of your settlement thus posing them with less risks.
Conclusion
Choosing a lender fully depends on the needs and preferences of your project. You will need to identify the type of account you want and whether you want a physically located or an online lender. Compare different lenders and their interest rates to determine which is best for you. Involving a broker in your application is highly advisable. This is because, they will cut out what is best for you and it doesn’t cost more than taking yourself to the bank but it will save you the hassle and time. Research thoroughly and look up from friends with the same experience before closing out on your loan. We hope this article has narrowed down you research and will help you understand better about loans before you make a decision.
FAQs
- How do I increase my chances of loan approval?
There are a few simple steps you can use to diversify your portfolio so as to get approved for the loan. These are:
- Improve your credit report by paying your bills on time, making repayments of outstanding loans, correcting mistakes on the report and paying your credit card debts on time.
- Lower debt to income ratio by increasing your monthly income, maybe ask for a raise or look for better paying job and minimizing your monthly debt by making extra repayments.
- Lay down a large down payment. Nothing assures a lender how responsible you are like paying a large deposit. Laying down a high amount of deposit reduces the loan to value ratio which in turn gets you a better deal on your home loan.
2. What are the factors that affect the interest rates?
Interest rates are dependent on factors such as time, taxation, and credit risk although they depend on the supply and demand curve
3. How do I decrease a loan amount?
You can decrease a loan amount by shopping for a lender with a lower interest rate, applying for a long-term loan or remortgaging to a lower interest rate.
4. Which are the components of a loan?
The components of a loan are: The principal, which refers to the money being borrowed, repayment period which refers to the length of time given to reimburse the loan and interest rate which refers he rate at which the owed money increases