4 Tips for Choosing the Best Bank Loan Option for Your Finances

When considering a bank loan, it is important to assess your financial situation from all angles. Many borrowers focus on their assets, but neglect their debts and creditworthiness.

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Understanding both sides—what you own and what you owe—can help you avoid being denied a loan or borrowing more than you can handle.

Consider these and other expert tips to choose the best bank loan option for your finances.

Know What’s on Your Credit Report

Christopher M. Naghibi, executive vice president and chief operating officer of First Foundation Bank, said that when looking for a bank loan, it’s important to first take a close look at your financial situation.

“A bank is going to vouch for your creditworthiness, and the more you know about your financial situation, the better equipped you’ll be to fill out your loan application and answer any questions that come up,” he said. “So while most people keep track of their assets, the things they know they have, they rarely keep as detailed a mental record of their debts. So know what’s on your credit report.”

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Evaluate your existing debts

Naghibi said that as a potential borrower, you should assess your existing debts to ensure you can afford and manage any potential new loan payments.

“If you can’t clearly demonstrate your ability to repay your debt over time, there’s a good chance you won’t qualify for a loan,” he added.

You should also consider your debt-to-income ratio, which measures the amount of debt you have relative to your gross monthly income. If your debt-to-income ratio is too high, lenders may reject your loan application.

Know how much you can afford

“Once you understand where you are, you need to orient yourself to where you’re going,” Naghibi said. “You can’t just ask for a million-dollar loan. Borrowing too much is bad, and taking on more debt than you need is a recipe for disaster. Generally speaking, you can ask yourself, ‘What is the monthly payment size I want to pay for this proposed loan?’”

Naghibi explained that your answer depends on the interest rate and repayment terms of the loan you are seeking.

“Given that you know your debts and what’s on your credit report, you probably have a good estimate of your credit score,” he said. “If not, most banks and credit card companies offer a free tool you can sign up for that will give you a good estimate of your credit score.”

Naghibi explained that your credit score will determine which programs and interest rate you’re likely to qualify for, so it’s important to shop around.

“That’s what mortgage brokers typically do on your behalf,” he said. “They typically listen to the rate markets and programs to know where to direct your loan application. I’ve always advocated that we should all own this process and understand it, whether we work with a broker or not.”

“A longer-term loan may lower your monthly payments, but it will increase the total amount of interest you pay over time. You may also want to consider choosing a variable-rate or fixed-rate loan. Don’t fall in love with a low payment. Learn the nuances of the underlying terms.”

Consider loan fees

Naghibi pointed out that some loans charge fees if the borrower repays the loan early.

“It’s important to understand whether these prepayment penalties apply,” he said. “They’re designed to ensure the lender gets a minimum return on the loan they’re offering. That way, you can’t get a loan today and pay it off next week if you find a better ‘deal.’ The origination fee, as you may have assumed, can add to the cost. Compare the fee structures of different lenders to get a full picture of the cost of the loan.”

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This article was originally published on GOBankingRates.com: I’m a Banker: 4 Tips for Choosing the Best Bank Loan Option for Your Finances