Smart Tips to Follow When Shopping for Personal Loans
When you need a new car, you don’t just buy the first car you see. You shop around to find the best deal. You should follow the same smart shopping technique when looking for a personal loan. Interest rates, fees and payment options can differ from lender to lender and from loan to loan, so check out several lenders before you decide on a personal loan.
Here are some important questions to ask potential lenders:
- What is the interest rate?
- How long do I have to pay off this loan?
- What will my monthly payment be?
- How much interest will I pay over the total life of this loan?
- Do you charge fees if I pay off my loan early?
- What fees will I have to pay with this loan, for example origination fees, late fees, application fees?
- When will you charge me a late fee and how much is that fee?
- Do you offer a variety of payment methods including online payments, pay by phone, payment by check or credit card, direct debit from my bank account? Is there a fee for any of those payment options?
The reason shopping for the best personal loan on the best terms is important is because you could save a great deal of money. Choosing a shorter term for your loan can also help you lower the amount of interest you pay.
The key is to make sure you find a loan that fits comfortably within your budget and one where you can make all your payments in full and on time to protect your credit rating.
Personal Loans Can Help You Pay for Anything
When you take out a personal loan, you’re free to use the money for any purpose. It all depends on your personal situation.
You could use your personal loan to:
- Fix up or add an addition to your home
- Pay off higher interest debt from credit cards or other loans
- Pay unexpected bills for car and home repairs
- Clear up medical or dental bills
- Purchase new furniture or appliances for your home
- Help your children pay for college or pay for classes for yourself
- Buy a new or used car
- Cover the cost of relocating
- Arrange a very special vacation
Personal Loans – Do You Really Need One?
That’s the most important question you should ask yourself before you decide to take out a personal loan. The answer will depend on your unique financial situation.
To decide whether applying for a personal loan makes financial sense for you, carefully think about these issues:
- What’s the best, most financially wise way to get the money you need? Do you need the money right away or could you wait and save what you need?
- Do you make enough money to cover the additional monthly expense a personal loan will add? Will the new payment stretch your budget and leave you with no extra money at the end of the month?
- Is what you’re planning to take out a personal loan to pay for something you truly need or is it just something you’d like to have?
- Are you in a position to make all your payments in full and on time?
- Is the amount of the personal loan you’re thinking about more than what you really need?
- Are there any big changes in your life coming up that will add to your expenses like the birth or adoption of a new baby, retirement or a job change?
Understanding the Details
Personal loans can differ greatly from one lender to the next. That’s why it’s important that you have a good, clear understanding of how your personal loan will work, what you’re promising to the lender and what the lender is promising you in return.
The problem can be that the language banks and other financial institutions use may be unfamiliar or confusing. Be an assertive borrower! Ask the lender to provide an explanation of all the details of your personal loan in “plain English.” If you don’t understand something, ask more questions until you get all the information you need to make a wise decision.
Because lenders are all different, it’s worth the effort to do some research about each lender before you decide which one you’ll choose for your personal loan. You can find the answer to these important questions on the Internet, at your local library and from other sources like your local Better Business Bureau.
For each lender, find out:
- If they have a solid financial history
- How many years they have been in business
- If other borrowers have filed complaints against them
- How current customers rate their service
Unique Features of a Personal Loan
While not all personal loans will have each feature or benefit described here, these are typical of most loans in this category.
- Applying and getting approval for a personal loan is quicker. When you compare the time it takes to apply for other loans like mortgages and home equity loans which require a lot of paperwork and background research, you’ll usually find there’s far less paperwork for your personal loan and it will be processed and approved faster.
- You can apply for a personal loan whether you own a home or rent. Many loans require that you promise your home as collateral or security for the loan, but that’s not the case with personal loans. Whether you own a home, rent or live with family members, you could qualify for a personal loan. When deciding whether to approve your personal loan, the lender will review a number of financial factors including your credit rating, your current income, your debt load and other issues that may affect your ability to repay the loan.
- Some loans have a floating interest rate that may rise and fall over the course of your loan. A personal loan, in contrast, has a fixed interest rate that cannot be changed during the term of your loan. Both the interest rate and your monthly payment will remain steady which will make it easier to plan your payments into your monthly budget.
- You can choose the length of time you want to repay your personal loan. Lenders usually offer a variety of repayment plans. When considering which plan is the best option for you, think not only about what your monthly payment will be, but also about how much interest you will pay in the long run.
How a Personal Loan Differs from a Secured Loan
When you take out a secured loan, you have to back your promise to repay with an item of value, for example your home or car. If you do not pay your secured loan back on time and in full, the lender can take possession of the property you pledged as security. That pledged property is also known as collateral.
A personal loan, on the other hand, does not require any collateral. All the lender has to guarantee your personal loan is your signature on the loan contract. This means the lender faces a greater level of risk with a personal loan. If you do not repay your loan, the lender has nothing of value to make up for the loss. Because of that increased risk, the interest rates on personal loans are often higher than on most secured loans.
It might seem that not paying back a personal loan is less serious than not repaying a secured loan where you could lose your house or car, but you do have something very valuable at stake with a personal loan. Failure to repay your personal loan can do serious damage to your credit rating.
Bad credit can affect your ability to borrow money in the future, to qualify for a credit card, to be considered for a job and to be able to rent a home or apartment. You’ve worked hard to build your good credit, so take these simple steps to protect it:
- Only borrow what you need and can afford to repay
- Pay on time every time
- Pay your full amount due every month
Differences From Credit Cards
You could use a credit card to pay for some of the things people use personal loans for, but before you decide which financing tool is best for the situation, you should be aware of the differences between how credit cards and personal loans work.
- Higher interest rates in many cases, with significantly higher interest charged on cash advances.
- Late payments can trigger an interest rate increase plus a late fee and finance charges.
- Shorter term to pay off your balance, usually a month or less with most credit cards.
- If your bill isn’t paid in full by the due date, you’ll have to pay finance charges on the total balance on your card.
- Rising balance and monthly payments if you continue to use your credit card for everyday purchases.
- Option to pay only the “minimum due” each month rather than full balance can mean it takes longer to pay off your debt and increases the amount of interest you pay in the long run.
- Fixed interest rate and monthly payments that will never increase during the entire term of your loan.
- Longer time to repay your personal loan (often several years) without additional fees or interest added on.
- When you’re approved, you will receive a check for the total amount you are borrowing.
- Your balance steadily decreases over time as long as you make all your payments, so your debt is not growing.
Be Smart When You Borrow
Most of us need to borrow money at some time in our lives. The key to borrowing smart is to follow these guidelines:
- Think carefully before borrowing. Is what you’re borrowing for an essential need or just a “nice to have”.
- Consider the time factor. Can you take the time to save the money or is your need immediate?
- Do your homework. Learn as much as you can about different lenders and the personal loans they offer before you choose a loan.
- Size up your options. Compare interest rates, repayment terms, fees and types of loans before making a decision.
- Understand before you sign. Always make sure you understand any documents you’re required to sign when taking out a personal loan before you sign them.
- Ask questions. There is no such thing as a silly question where your finances are concerned. If you have questions about the paperwork or the information included in your loan documents is different than what the lender originally explained to you, find out why before you sign anything. If they are not willing to provide a clear answer, be willing to walk away and seek your personal loan elsewhere.
- Know what you can afford. Before deciding to apply for a personal loan, make an in-depth review of your financial situation. How much do you make each month? How much do you pay out for bills and other expenses? Are there any big financial changes on the horizon?
- In hard times, talk to your lender first. If you have difficulty keeping up with your personal loan payments, talk to your lender right away. Most lenders are willing to put together a repayment plan to help you deal with the situation.
- Protect your good credit. The number one rule for good financial health is to always make your personal loan payments on time and in full.