I’m a Bank Officer: 4 Tips for Choosing the Best Bank Loan Option for Your Finances
By Cynthia Measom,
28 days ago
SDI Productions / Getty Images
When you’re considering a bank loan, it’s important to evaluate your financial situation from every angle. Many borrowers focus on their assets but overlook their debts and credit health.
Christopher M. Naghibi, executive vice president and chief operating officer of First Foundation Bank , said that when you’re looking for a bank loan, it’s important to take a hard look at your financial position first.
“A bank is going to underwrite your creditworthiness, and the more you know about your own financial position, the better you will be able to complete your loan application and answer any questions that arise,” he explained. “So while most people keep track of their assets, the things they know they own, they rarely keep as detailed of a mental track record of their liabilities. So know what is on your credit report.”
Naghibi said that, as a potential borrower, you should evaluate your existing debts to ensure you can afford and manage any potential new loan payments.
“If you can’t exhibit a clear ability to repay your debt obligation over time, odds are, you are not going to qualify for a loan,” he added.
Also, you should consider your debt-to-income ratio, which measures the amount of your debts related to your gross monthly income. If your DTI is too high, lenders may reject your loan application.
Know How Much You Can Afford
“Once you understand where you are, you need to pivot to understanding where you are going,” Naghibi said. “You can’t just ask for a million dollar loan. Overborrowing is bad, and taking on more debt than you need is a recipe for disaster. Generally speaking, you can ask yourself, ‘How much of a monthly payment do I want to make for this proposed loan?'”
Naghibi explained that your answer depends on the interest rate and repayment terms for the loan you are looking for.
“Since you know your liabilities and what is on your credit report, you probably have a good approximation for your credit scores,” he said. “If you don’t, most banks and credit card companies have a free tool you can subscribe to, which will provide you a good approximation of what your credit score is.”
Naghibi explained that your credit score will determine what programs and interest rate you are likely to be able to get, so it’s important to shop around.
“This is what loan brokers typically do on your behalf,” he said. “They typically have their finger on the pulse of the rate and program markets to know where to take your loan request. I have always advocated that we each should own this process and understand it, whether you work with a broker or not.
“A longer term loan can reduce your monthly payments, but it will increase the total interest you pay over time. You may also see variable versus fixed rate loans to consider. Don’t fall in love with a low payment. Know the nuances of the underlying terms.”
Consider Loan Fees
Naghibi pointed out that some loans charge fees if the borrower pays off the loan early.
“It’s important to fully understand whether these prepayment penalties apply,” he said. “They function to ensure the lender a minimum amount of profitability in making the proposed loan accommodation. This way, you can’t get a loan today and pay them off next week if you find a better ‘deal.’ Loan origination fees, as you may have assumed, can add to the cost. Compare fee structures across lenders to get a full picture of the loan’s cost.”
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