If you are going to buy a new car, consolidate your debts, do home renovations or pay off your student loans, a personal loan could be the answer to your cash requirements. The plus side can be lower interest rates than using a credit card and variable terms.
However, there are things to look for when you're choosing a personal loan to make sure you're getting the best deal for your situation. These five important tips will help you make sure you're getting the right personal loan:
1) Compare interest rates.
It's vital to have a personal loan interest rate comparison as rates are steadily increasing nowadays. You'll want to look for the lowest rate available in order to save money in the long run.
There are two different types of loan interest rates: fixed and variable. A fixed rate means you are locked in to paying a certain rate of interest over the duration of the loan. A variable interest rate means the rate changes with the rise and fall of inflation and the market. Both have their advantages, as you can imagine.
For example, a fixed interest rate is very attractive because your payment remains the same amount for the duration of the loan. If the economy should suffer, you will be happy to know that your charge will stay the same and not fluctuate on a monthly basis like a variable interest rate. However, if you are locked into a high interest rate and then interest rates drop, you'll end up paying much more on your personal loan.
To decide which is better, you'll want to take into consideration your monthly income. If you have a tight budget a fixed rate is much more attractive. In either case you'll want to look at the total repayable amount, not just the APR for the loan.
2) Time.
When getting a personal loan it's important to consider the length of time you want to take to repay the loan. There are many different time periods to choose from, starting at as little as a year, depending on the size of the personal loan.
The advantage of a longer time period is a lower monthly payment, which is attractive for obvious reasons. However, do you realize you'll be paying more money in the long run? Taking longer to pay off a loan means more interest paid on the money you've borrowed. So consider a shorter amount of time if you can find one with a monthly payment you can still afford.
3) Secured vs. Unsecured Personal Loans.
Everyone likes security, and the bank is no exception. A secured loan means that the bank uses your home, a car, or other item of value as collateral toward the loan. The benefit is security for the bank and a lower interest rate for you. An unsecured loan is one without collateral to back up the loan in the event of default of payments. There are banks who offer more appealing interest rates on secured loans and better terms, for good reason. They feel more confident loaning you money since you have something of value to offer if you default on the loan.
Before you consider a secured loan, however, think things through carefully. Though it sounds like a technicality to use your home as security to gain a personal loan, it's a bargaining chip the bank won't hesitate to use. Though no one enters a loan agreement planning on not paying their debt in full, life still happens, sometimes in a bad way to nice people. So if you lose your job and fall late on a few payments, you may be forced to sell your home to pay off your personal loan.
4) Nothing Is Free.
The bank doesn't make money on just the interest they charge you on a personal loan. There can be several fees that crop up, tacking more money onto the total payment amount of a personal loan. If you can, you'll want to find a bank with the lowest fee amounts when applying for a personal loan.
- Application Fees: There are many loan establishments that charge you when you apply for a personal loan, you must ensure that you get the best available rate. Free is always nice, but if free application means you're paying a point or two more in your interest rate then you may want to reconsider dealing with that bank for your personal loan.
- Monthly Fees: Sometimes, when processing the loan, banks will charge a monthly service fee. These charges add up over the length of the loan so make sure you get a loan with the lowest service fee available. A personal loan with no service fee is even better!
- Early Payment Fees: Some personal loan types penalize you for paying your loan back before the assigned date. When you pay back your loan early the bank loses out on the interest. To keep from losing out when you pay a loan early a lot of loan institutions will charge a fee to discourage you from paying early and to recoup money. You'll want to choose a loan that offers no fees on early repayment, if possible, to make early personal loan payment an option. This way you can make early payments or additional payments each month if the opportunity presents itself.
5) Be Honest and Selective.
Before applying for a personal loan, it is important to be selective about where you choose to apply, and be honest when asked why you need the money. When you apply to many different banks and credit establishments hoping someone will give you money, your credit record reflects this. If you've been to a lot of different places asking for money, some banks may see this as a warning not to lend to you. So take your time, research companies that may grant your loan, and only apply at the ones that will best suit you.
Honesty is the best policy as well. If you tell the bank you need the money to refurbish your home, or buy a new car they may be able to offer you a better personal loan deal that fits your needs and budget.
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