What does it mean to shop around a loan?

Once you know how it works, you can shop for a loan with confidence—and potentially save money. Most advice that even mentions getting a loan typically repeats one phrase like a mantra: Shop around.

But what does it really mean?

When folks tell you to shop around for a loan, they don't mean going from store to store. The idea is 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 low rates advertised online. Most ads include broad ranges or best-case-scenario terms that only a few people are offered.

What you want are personalized quotes based on your specific qualifications. But this doesn't mean you have to fill out loan applications left and right. In fact, too many loan applications at once could damage your credit score.

How shopping around for lenders can impact your credit

When you apply for a loan, the lender requests 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 lessens after about a year.

Multiple hard credit inquiries in a short period of time could look like you're trying to take on a lot of new debt at once. That may concern lenders, and it could 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 for credit scoring purposes. Personal loans don't have this grace period, so it's smart to get quotes for personal loans using soft inquiries whenever possible.

Hard vs. soft credit pulls

Hard credit pulls are usually the result of a credit application. A soft credit pull or soft inquiry usually happens when a lender (or another person or organization) requests your credit report but it isn't part of an active credit application.

Since you're not trying to borrow money yet, a soft inquiry doesn't impact your credit score. It typically doesn't even show up on your credit report at all.

So, 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 prequalification.

Prequalify to avoid credit dings while shopping around

Many lenders offer loan prequalification, which is sort of like a practice application. You provide some basic info, like your name, address, and your Social Security number. Then most lenders make a soft inquiry on your credit to gauge your general credit history. (Some lenders might use a hard inquiry for prequalification, so ask first if you're not sure.)

If the lender likes what it sees, it may give you a prequalification offer with some estimated terms based on your general qualifications. You can then choose whether to formally apply.

Prequalification is not a guarantee you’ll get a specific rate, or even that you'll be approved at all. The lender may reject you when you apply for a loan even if you've prequalified. Even so, prequalifying 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 turns up lenders, but it also will probably find a lot of loan networks, too. These are lead-generation platforms that partner with online lenders. Here's how loan networks typically work:

• You fill out a prequalification application with the loan network.

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

• If your qualifications match with lenders, 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.

You can go directly to an established lender, such as Achieve Personal Loans, to avoid handing your info to many partners at once. Indeed, it's smart to get quotes from local banks or credit unions, as well as online lenders, so you can get a full picture of your options.

How to compare loan offers

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 generally 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 overall.

• Lender reputation. You'll deal 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 payments.

Generally, the most useful number for comparing personal loan offers is the APR (annual percentage rate). APR includes the interest rate plus many lender fees. This helps you directly compare the annual cost of loans with different interest rates and origination fees as long as they have the same term.

Here's a simple illustrative example of how APR changes what a loan costs. Say you borrow $10,000 and pay it back over three years:

In some cases, a loan with a lower interest rate but higher origination fee may cost more overall than a loan with a higher rate but lower fee—or vice versa. The APR can help you compare the actual yearly cost instead of just the interest rates.

Tips for cutting down on loan spam

When you agree to let a lender contact you about loan offers, you’ll likely get 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 spam while shopping for loans by following these tips:

• Uncheck the permission boxes when you can. Don't agree to let lenders 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 rather than giving out your real 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 worth a bit of time investment.

Ready to start shopping around for your next loan? Find out if you qualify through Achieve Personal Loans.