How to compare installment loan lenders and find the best offer

Installment loans are credit products allowing you to borrow a lump sum you repay in fixed, monthly installments over a set period of time. There are many types of installment loans, including personal loans, mortgages, auto loans and student loans.

If you haven’t already taken out an installment loan, you likely will at some point in your life. Luckily, choosing the right installment loan and managing it well can help you afford expenses and improve your credit score.

Look at each lender’s requirements to set your current and future self up for success. Compare them to your credit score, financial health, current debt load and previous repayment history before signing on.

Comparing installment loan lenders: 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. Read lender reviews

Installment loans are offered by nearly every type of financial institution, including online lenders, banks, credit unions and peer-to-peer lenders. A good way to narrow down which lenders to compare is by looking at lender reviews.

You can read lender reviews on websites like Trustpilot and the Better Business Bureau (BBB). Knowing what others liked or disliked about lenders can help you determine which you’d like to explore further.

2. Research the lenders’ eligibility criteria

Each installment loan lender has different approval requirements.

Most have specific minimum income or credit score requirements. For example, borrowers with FICO Scores above 670 will usually have more options to consider, like banks and other good credit lenders. Those with lower credit scores may need to explore credit unions, peer-to-peer lenders and online lenders specializing in fair credit loans.

Lenders will also likely take a look at your debt-to-income ratio (DTI), which helps determine how much loan you can comfortably pay back.

Before jumping into an application, read through the minimum eligibility requirements to make sure you meet the basic criteria. Most lenders house this information in a “frequently asked questions” section of their website.

3. Compare fees and funding times

When shopping for an installment loan, also compare fees that can drive up your borrowing costs. Common fees include:

• Origination fees: An origination fee is a set percentage — typically between 1 percent and 10 percent — of the approved loan amount. It is taken from 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.
• Documentation fees: This fee covers the lenders’ costs for reviewing your application and underwriting your loan.
• Prepayment penalties: Lenders charge these fees to discourage borrowers from making more than their set monthly payment and paying the loan off early. Repaying your loan early can mean the lender gets less interest, which is why some lenders discourage it. If you expect to repay your loan before your term is up, make sure to understand what it will cost you. Or, find a lender that doesn’t charge prepayment penalties.

Also, if you need the money fast, be sure to compare lenders that specialize in faster funding. Online and alternative lenders tend to offer faster funding than traditional lenders, like banks.

4. Compare available terms

Whether a lender meets your needs is as important as the rates offered. Make sure you’re getting what you need out of your loan. For example, if you need a flexible repayment structure, look for lenders that allow payment date changes. If you have a particular repayment period in mind, make sure you compare lenders that offer it.

Using a loan calculator can also help you compare terms to decide which is best for you.

5. Prequalify and compare rates

Prequalifying for a loan allows you to see your predicted eligibility odds and rates with no impact on your credit score. Not every lender offers prequalification but if possible, prequalify with at least three of your top lenders.

Research average rates for your credit band and type of loan. Compare that with your prequalified offers. Cross out the lenders that don’t offer competitive rates or are unlikely to approve you. Also, check to see what type of interest a lender charges — like simple or amortization — and how that would impact your repayments. For example, if you think you may pay off the loan early, a simple interest rate may be more beneficial.

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 before applying for a loan.

How to get an installment loan with bad credit

Installment lenders prefer borrowers with high credit scores. While it may be harder to find lenders if you have bad credit, it’s not impossible.

• Improve your credit score: If you don’t need the funds immediately, consider improving your credit score before taking on a loan. While you can’t grow your credit overnight, there are things you can do to build credit quickly. As a first step, look for reporting errors on your credit report. Asking the credit bureau to correct errors like incorrectly marked account statuses may result in a better score within 30 days. However, the best way to grow — and sustain —credit growth is through good repayment history and credit utilization. Focus on making regular, timely payments and paying off any late balances to grow your score.

• Look into bad-credit lenders: Bad credit lenders often adopt untraditional lending and approval models to extend credit to borrowers with less-than-perfect scores. Remember that these loans often come with higher rates and fees than loans for good credit borrowers.
• Consider a secured installment loan: Some lenders offer secured installment loans to those with poor credit. These loans are backed by collateral, like a house or car, reducing the risk for the lender or company. Beware: If you fail to make your monthly payments, the lender can legally seize your collateral.

Alternatives to installment loans

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

• Borrow money from a family member or close friend: If you decide to go this route, make sure to have a written agreement to hold both parties accountable. Uphold your end of the agreement to preserve your personal relationship.
• Get a credit card with a promotional rate: Most credit cards come with steep interest rates that could make your spending costly. Opt for a card with a 0 percent interest rate introductory period if you qualify. During the intro period, you can pay down your balance without accumulating interest. Just make sure the card waives, not defers, your interest during the promotional period.

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.

Assess your financial health and compare offers from multiple lenders before deciding on a loan. Doing this will help you narrow down your choices and choose the loan with the best terms and interest rates for your situation.