5 Tips for Choosing a Personal Loan
We all want and need money, but for some people, those long hours and stacked overtime in the office just don’t fit the bill. Whether you’re a graduate student looking for some extra cash while going to school, a couple looking for a new home, or even just someone looking for a little financial assistance, personal loans can be a great choice.
The concept of a personal loan is super simple — you get money and then you pay it back with interest. The tricky part is finding a personal loan that works in your favor. Luckily, there are 5 solid tips to follow to make sure you choose the personal loan that’s perfect for you and your situation.
Know what you can and can’t afford
A trap that many people fall into is getting a huge loan that takes them decades to pay off. If you are looking for a huge loan ($30,000 +), make sure you’re able to pay it off in a decent amount of time. It’s important to remember that loans are not a one sum and done type of deal; the lender can and will charge interest. The longer it takes to repay your loan, the more interest they will charge and many people end up paying back thousands of dollars more than they initially borrowed.
Depending on your situation, this may not be a problem. If you’re a graduate student, for example, and you know that once you graduate you’ll receive a large increase in salary, you will have a great return on your investment. In other words, you’ll be making more money because of your loan than you did before you got it, so you should be able to pay it off quickly and with as little interest as possible.
Know your [credit] worth
Don’t be fooled by the nice person in the suit jacket saying they are here to make your dreams come true. Loan lenders have particular formulas they use to determine your loan amount, interest, and repayment schedule.
Before even approaching a lender, you need to know your credit score (based on payment history, debt, credit length, and more), income, and your debt-to-income ratio (how much you owe versus how much you earn). The ideal borrower will have a credit score over 700, a stable income and a low ratio. If you don’t fit into that category, that doesn’t mean you can’t get a loan, it just means that you need to plan on having a higher interest rate and look for lenders that specifically work with people who don’t meet that standard mold.
Narrow down the type of personal loan
Because understanding loans wasn’t confusing enough, right? There are different types of personal loans available, which can help you narrow down the perfect lender:
- Secured loans are backed by equity. This can be your home, auto, savings, or investments that the lender will acquire if you fail to repay your loan.
- Fixed-rate loans charge the same interest rate throughout the loan’s duration and are usually higher.
- Variable-rate loans change interest rates throughout the loan’s duration. They usually start lower, but the lender may increase the rate later on.
- Peer-to-peer loans are funded by individual investors rather than big banks or corporations.
Find the top providers
A loan search is not the time to find a hole-in-the-wall business with neon signs. You are trusting someone to be honest, fair, and set a specific timeline for you to repay a large amount of money. The last thing you need is for someone to go “off the books” and give you a deal that’s too good to be true.
Look for reputable, well-trusted lending companies that will help you with your decision. Try to find top-rated options in every loan category you are considering. Consider a loan as a big purchase, like a car for example. You wouldn’t go to any old junk shop for the first car you see on the lot. You want to talk to the best dealers, read honest reviews, and make a well-researched decision.
Compare your offers
At the end of the day, you need to approach multiple lenders about a loan. The first place you see might not be the one that offers you the best deal. Apply to multiple places and when you get your offers, lay them out on the table and calculate exactly how much each one will cost and benefit you in the future.
Make sure to look at the following:
- Annual Percentage Rate (APR)
- Loan origination fee
- Loan term
- Repayment frequency
- Interest accrued over time
To sum it all up, do your research. You’re going to want to opt in for as short a loan of possible with a reputable lender that will help you finance your goals. The main things you would want to know regarding your loans are interest, penalties, and additional charges. Read up on a lender’s approach to these three things and you’ll have a good idea of what your long-term (or short-term) relationship with them will be. We all know the phrase, “More money, more problems,” but that doesn’t have to be the case if you make smart financial decisions to secure your future.