Comparing personal loans can be a complicated process if you don’t know where to start. With so many lenders, there are a few things to keep in mind while shopping around. Let’s take a look at some simple steps that will guide you in the right direction when applying for a personal loan.
What Is A Personal Loan?
A personal loan is when a bank lends you money that comes with a fixed interest rate and a fixed repayment term. That means the borrower will make a fixed monthly payment until the loan is paid off for the length of the term. This can be a great benefit since you’ll know exactly how much you owe and for how long.
There are two different types of loans, secured loans and unsecured loans. The difference between the two is that secured loans require the borrower to put up collateral whereas unsecured loans don’t require collateral. Personal loans are considered unsecured loans making it a risk for lenders. For that reason, lenders typically offer personal loans with higher interest rates and additional fees.
What Should You Know?
There are a few things you should know when looking around for personal loans. It’s important to do some research to make sure you know what you’re getting into and how you can qualify for one. Here’s a quick checklist of things to know as you consider applying for a personal loan.
- 1. Repayment Term: When shopping around for a personal loan, make sure to compare repayment terms. This can be overlooked at times when irresponsible borrowers make poor decisions. A personal loan that comes with a longer repayment term can come with a higher interest rate with longer accrued interest over the life of the loan. It’s recommended you consider a shorter repayment term to accrue less interest.
- 2. Credit Score: Your credit score will affect your approval of the loan. If you have good to excellent credit, you’ll be more than likely to be approved with lower interest rates. If you have bad credit, you’re chances for approval is lower and will come with a higher interest rate.
- 3. Cosigner: If you have bad credit, having a cosigner will increase your chances of being approved. Something you can consider if you find yourself in a bad situation.
- . Paying Off Debt: It’s best to pay off as much debt possible before applying for personal loans. If you have any outstanding debt that can be easily paid off, it can improve your chances of qualifying for a bigger loan and lower interest rate. Bottom line is that you should pay your bills on time and pay off as much as you can.
What to Consider When Comparing Personal Loans
The personal loan market is competitive providing you with an abundance of options. Invest some extra time comparing multiple loans that works for you. While comparing personal loans, there are some key factors you should consider to help you make the right decision.
- 1. Application Process: Depending on your situation, the application process can be crucial when making your decision. In some cases, online applications can be a quicker process rather than going to your local bank. Many lenders disclose the length of the application process and completion. Make sure to consider the application process if there’s an emergency that requires immediate action.
- 2. Credit Score: As discussed earlier, your credit score is an important factor. When comparing different personal loans, your credit score can help you qualify for a better offer. You won’t always qualify for the one you exactly want and having good credit will help. Credit score will also have impact APR. Always consider your credit score when comparing personal loans to understand the likelihood of being approved for lower rates.
- 3. APR: One of the most important factors when comparing personal loans is the annual percentage rate (APR). By comparing the APR of different loans, you’ll know exactly how much total interest is owed on the loan before making your choice. Depending on your options, choosing the personal loan with lower APR is usually recommended. Some offers may have a lower APR that includes a higher origination fee making it a less attractive option.
- 4. Origination Fee: An origination fee is a fee charged by the lender to cover the cost of processing the loan. This is another factor that can’t be overlooked when comparing loans. Origination fees can affect your decision in two different ways. For example, if you’re comparing two different loans with the same APR, repayment term, and loan amount, one may include an origination fee and the other does not. In this scenario, the loan without the origination fee will be the best option. In different scenario, consider two different loans with the same loan amount and repayment term. Loan A will have a higher APR with no origination fee and Loan B will have a lower APR with a $100 origination fee. Loan A and B will have the same amount owed over the lifetime of the loan making neither a good choice.
Finding a personal loan that’s best for you can simple by following simple steps and comparing them with one another. With so many personal loans available, it’s just a matter of time until you find the loan that’s right for you.
1. https://www.magnifymoney.com/blog/personal-loans/the-ultimate-guide-to-personal-loans1210109673/ 2. https://studentloanhero.com/featured/compare-personal-loans-guide/ 3. https://www.fool.com/the-ascent/personal-loans/articles/how-to-compare-personal-loans/