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Your home bank is far less likely to view you as a number that needs to undergo a risk assessment.
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One of the most important financial moves you can make is to rate shop before taking out a loan of any kind. It’s only after checking with several lenders that you can be sure you’re getting the best deal. That said, you should first check with your home bank or credit union.
Here are five reasons why.
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1. A powerful, often overlooked human response
As humans, we crave human connection — and there’s a good reason for it.
A decade ago, a great article in Scientific American explored how we’re wired to connect with each other. According to scientist Matthew Lieberman, our need to connect is as fundamental as our need for food and water.
Our need for connection is so great that scientists say loneliness can lead to a host of physical and emotional problems. According to cognitive scientist and Yale psychology professor Laurie Santos, surveys indicate that around 60% of Americans report feeling lonely on “a pretty regular basis.” Santos said, “And everything we know suggests that loneliness might be as big of a public health threat in terms of the effect that it has on our bodies and our minds.”
Think of the last time you felt rejected or excluded from a social situation. If what you experienced felt a lot like physical pain, that’s because the feelings are as intense as physical pain. Lieberman says that humans have evolved to view social rejection as a threat to our survival. In other words, our ancestors knew they could not survive on their own, and the loss of camaraderie was a risk. We carry the need for connection with us to this day.
Takeaway: Even if your financial institution offers the option to apply for a loan directly through its website, it’s a good idea to make an appointment with a loan officer for an in-person meeting.
2. You’re more than a number
This matters because everything boils down to relationships. If you have banked with your financial institution for years, employees may know your name. At the very least, they may recognize your face. Even if we’re not close friends with someone, there’s a comfort to be found in seeing a familiar face.
When you walk into your home bank, you’re more than just a number. You’re a loyal customer, someone the staff hopes to keep happy. They may even know your family members or, at the very least, think you have excellent taste for choosing to bank there.
Finally, if you qualify for a personal loan with your home bank, it may look for ways to reward you. It’s common for banks to save the best interest rates and loan terms for their current customers.
Takeaway: If you know a particular loan officer, ask to meet with that person to discuss loan options.
3. You may even be an “owner”
If you happen to be one of the estimated 132.6 million credit union members, you may benefit from that membership. Credit unions are nonprofit organizations, and as such, each member owns a small piece of the financial institution. Members can run for a position on the board of directors, no matter how much or little they have in their checking accounts. They’re allowed to vote on all major issues facing the credit union.
Another benefit of being a nonprofit organization is that credit unions have more flexibility regarding loan approval. For example, if a member’s credit score is less than perfect, a credit union has more wiggle room when deciding whether to grant a loan. It’s more likely to look at things like how well that member has managed their accounts and how long they’ve worked in their current field.
Takeaway: Whether you’re a credit union member or bank customer, focus on boosting your credit score before there’s a need for a loan.
4. Offering collateral becomes a realistic option
The European Central Bank describes collateral like this: “Collateral is an item of value that a lender can seize from a borrower if he or she fails to repay a loan according to the agreed terms.”
According to the blog LendEDU, 76.12% of loan applications are denied. While several factors go into loan eligibility, two of the most common reasons for denial are a low credit score or poor credit history. And that’s where collateral can come in handy.
By giving a lender something of value “to hold,” it knows that if you fail to make payments, it can sell the collateral and recoup the lost money. A lender does not take physical possession of the collateral unless you miss payments.
Typically, a lender that deals with collateral will accept any item of value that can be appraised. For example, you may use heirloom jewelry, gold coins, a classic car, or property to secure a loan. Some people even use investment accounts, like an IRA. Once the item is appraised and the lender knows its worth, it can determine whether the collateral is valuable enough to cover potential losses.
Online lenders can be an excellent source for low-interest personal loans. However, they are not able to accept collateral to secure a loan because it would be challenging to appraise items or repossess and sell the collateral if needed.
Takeaway: If you’re concerned that your credit score isn’t high enough to qualify for a loan, consider whether securing a loan with collateral is the right move for you. One important thing to keep in mind is this: If you miss payments, the lender will take possession of that collateral, sell it, and recoup its losses.
5. You can look someone in the eye
Getting back to that need we have for human connection, there’s power in looking a person in the eye. Rather than some random number on a loan application, you’re a real person who truly needs a loan. You can explain why you need the money and how you plan to use it. If the bank officer has any questions about your credit history, you’re right there to answer.
For example, if you’ve only been out of college for a year or two and have not built a credit history, you can explain this to the loan officer. If there was a divorce in your recent past and it damaged your credit score, you can point out which financial obligations were yours.
If the lender denies your loan request, you can ask whether you would qualify for a smaller loan with a shorter term. You can also find out if the lender accepts cosigners on loan applications. In short, there are avenues open to you when you’re face to face with someone that are unavailable when your application is just another piece of data run through a loan approval algorithm.
It’s difficult not to feel for the person sitting across the desk from us. Working with your bank means sitting down with someone who would prefer to see you happy, especially when they know they will likely see you again in the future.
Takeaway: Never underestimate the power of human connection in lending.
Whether things work out with your home bank or not, you owe it to yourself to check with several lenders. The pre-approval process consists of a “soft” credit check, which will not impact your credit score. Typically, a lender will not conduct a “hard” credit check until they’ve pre-approved your loan and you’ve committed to accepting the loan. The ding to your credit caused by a hard credit pull should be minimal and your score will rebound once you begin making regular monthly payments.
It’s easy to view banks as cold, impersonal organizations. But financial institutions are filled with flesh-and-blood humans, knowledgeable and willing to help. Those are the people you can turn to as you navigate the loan process.
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