What does it mean to shop around a loan?

Learning how to shop for a loan could make you more confident—and potentially save you money. Most advice on getting a loan includes the same well-worn nugget of wisdom: shop around. Indeed, every article, video, and podcast that even mentions getting a loan will typically repeat this same phrase like a mantra.

But what does it even mean?

When folks tell you to shop around for a loan, they don't mean going from store to store. They mean you need to compare loan offers from a few different lenders and choose the best one. This could save you a lot of money if you find a better offer.

Compare personalized quotes, not general terms

The internet can be a great tool for researching lenders, but don't be fooled by the shiny rates you find advertised online. Most ads include broad ranges or best-case-scenario terms that only a few people are offered.

What you really want is personalized quotes based on your specific qualifications. But this doesn't mean filling out loan applications left and right. Too many loan applications could damage your credit score.

How shopping around for lenders can impact your credit

When you apply for a loan, the lender will request your credit report from at least one credit reporting bureau. This request is called a hard inquiry or hard pull. Each hard inquiry stays on your credit report for up to two years, but the impact can lessen over time.

Multiple hard credit inquiries in a short period of time could look like you're trying to take on a lot of new debt—and that could concern lenders and ding your credit score. 

You have a grace period for auto and home loans (14 days for auto loans, 45 days for mortgages) when multiple inquiries are treated as one inquiry. Personal loans don't have this grace period, so you need to get quotes for personal loans using soft inquiries.

Hard vs. soft credit pulls

Hard credit pulls are usually the result of a credit application. A soft credit pull is when a lender (or another person or organization) makes a credit inquiry that isn't part of an active application. Since it doesn’t always mean you’re taking on new debt, a soft credit pull doesn't impact your credit score.

The best way to shop around for a loan without hurting your credit is to get quotes from lenders that use soft inquiries. This is typically called pre-qualification.

Pre-qualify to avoid credit dings while shopping around

Many lenders offer loan pre-qualification, which is sort of like a practice application. You'll provide some basic info—name, address, and the last four digits of your Social Security number—and the lender will make a soft inquiry on your credit.

If the lender likes what it sees, it may give you a pre-qualification offer. You'll get some personalized terms based on your general qualifications. You can then choose to apply (or not).

Pre-qualification is not a guarantee. The lender may still reject you when you apply for a loan even if you've been pre-qualified. Even so, pre-qualifying can be a good way to estimate your offer terms when shopping for a loan.

The pros and cons of shopping loans with a loan network

An internet search for loans will definitely provide lenders, but it will also turn up a lot of loan networks. These are lead-generation platforms that partner with online lenders. Here's how loan networks typically work:

• You fill out a pre-qualification application with the loan network.

• The network compares your qualifications with the requirements for its partner lenders.

• If you have matches, the network shows you the offers.

• You can pick an offer and fill out an application directly with the lender.

A loan network can be easy and time-saving, but it also means giving your information to lots and lots of lenders, so prepare for spam. Additionally, it's a good idea to get a quote from at least one local bank or credit union while shopping your loans.

How to compare loan offers

You'll want to consider rates and fees, but don’t forget to check other factors like reputation and user reviews. Here are some areas to compare when shopping loans:

• Interest rates. A higher interest rate means a more expensive loan overall.

• Loan or origination fees. Some lenders charge a fee to process your loan.

• Repayment term. A longer loan term means smaller monthly payments but you'll likely pay more in interest in the long term.

• Lender reputation. You'll be dealing with this lender every month for the next few years, so read some reviews and look for any red flags.

• Convenience. A good mobile app, autopayments, and similar features could make it much easier to stay on top of your loan.

Tips for cutting down on loan spam

When you agree to let a lender contact you about loan offers, you will absolutely be contacted—a lot. And if you gave them permission to share your information, then you'll probably be contacted by all the lender's friends, too.

Minimize the spam while shopping for loans by following these tips:

• Uncheck the permission boxes when you can. Don't agree to let them share your information.

• Create a new email address. Use this email address for loan shopping instead of your regular email.

• Use a virtual or temporary phone number. These are phone numbers you can use through an app on your device to make and receive calls. This lets you avoid giving out your personal number to lenders and loan networks.

It takes more work to shop around for a loan than to pick the first lender you see. But that extra work could save you a lot of money and hassle. Loan shopping is always worth a bit of time investment.