How to compare loan offers

APR vs interest rate

The interest rate is what the lender charges you to borrow the money. The APR, or annual percentage rate, is the interest rate plus certain fees charged with the loan, like origination charges.

That makes APR the better number for comparing offers side by side. If two loans have the same rate but different APRs, the one with the higher APR has more fees built in.

Watch the fees

Many loans have an origination fee, charged when the loan is made. It's included in the APR, but ask the lender for the dollar amount, how it's paid, and what you'll repay in total.

Also ask whether there's a prepayment penalty, a fee for paying off all or part of the loan early. Some loans have one and some don't. If you think you might pay early, ask for a quote on a similar loan without one.

Fixed or variable rate

A fixed rate is set when you take out the loan and doesn't change. Your payment stays predictable.

A variable (or adjustable) rate can go up or down. It may start lower, but your payment can rise later. If you're considering one, look at the worst case: what would you pay if rates went up?

Loan length: lower payment or less interest

A longer loan usually means a lower monthly payment, but you pay interest for longer, so the total cost goes up. A shorter loan costs more each month but less overall.

In a CFPB example, a $20,000 car loan at 4.75% costs about $1,498 in interest over 36 months, and about $3,024 over 72 months. Look at the total cost over the full term, not just the monthly payment.

Check your rate before you apply

Some lenders let you prequalify, or check your likely rate, before a full application. Ask whether they'll use a soft or hard credit inquiry. Soft inquiries don't affect your credit scores.

A full application usually means a hard inquiry. For mortgage, auto and student loans, FICO counts several inquiries within a short shopping window as one, so it's fine to compare a few lenders around the same time.

Mortgages: use the Loan Estimate

For most mortgages, lenders must send you a Loan Estimate within three business days of receiving your application. It's a standard three-page form, so you can compare lenders line by line. Before you get one, a lender can only charge a small fee for pulling your credit.

Ask each lender for the same loan type so the estimates match. Compare the rate, the monthly payment, the lender's own charges like origination fees, lender credits, cash to close, and the "In 5 years" line on page 3. Check for risky features like a prepayment penalty or balloon payment.

• Points (also called discount points) are an upfront fee to lower your rate. One point equals 1% of the loan amount.
• Points can make sense if you'll keep the loan a long time. If you might sell or refinance soon, they may not pay off.
• Lender credits work the other way: help with closing costs in exchange for a higher rate.