How do you compare personal loan offers from competing financial institutions?
By looking at more than interest rates.
You'll also consider the loan costs and terms to find the right product for you at the lowest cost.
Unsecured Loans: Finding the Best Loan Options
Personal loans are pretty straightforward.
Unlike credit cards or other open-ended financing, personal loans usually come with fixed interest rates, definite repayment periods and unchanging monthly payments.
The loans are usually unsecured, which means there is no collateral to appraise, and the money can be used for any purpose.
Getting a personal loan doesn't usually take very long because there are so few moving parts.
Before contacting lenders for quotes, you'll want to establish the purpose of your loan and what's most important for you.
If the most important factor is a loan amount over $50,000, for instance, you can bypass lenders that max out at $35,000. If you want the lowest possible payment, seek lenders offering the longest terms.
Run your numbers through an online personal loan calculator to see how the interest rate and term affect your monthly payment and total loan costs. Financing an amount over a longer period gets you a lower monthly payment. However, you'll pay more interest over the life of the loan.
Next, determine what sort of borrower you are. Some lenders only want applicants with excellent credit, while others specialize in financing people with bad credit or take the middle ground. You'll save time and pay less for your loan if you stay in your lane when shopping for financing.
Contact Lenders for Personal Loan Offers
If, for instance, you want to borrow $50,000 for ten years and have good credit, approach lenders offering higher loan amounts and longer terms. The ones who market to borrowers with good credit will probably offer the lowest rates. So contact those lenders and then compare their offers.
How do you find personal loan providers?
Check with a variety of online lenders and perhaps ask your local bank or credit union. If you already have a relationship with a lender - maybe you have a couple of auto loans there - check in and see what they'll offer. If your credit has a few dings, a good track record with an existing account might pave the way for an approval.
How do you get good quotes for comparison?
It's a good idea to contact all of your candidates on the same day if possible, because interest rates can change frequently. A quote from Lender A on Monday might not mean much when compared to Lender B on Friday.
To get the most informative quotes, give the lenders an estimate of your credit score, your total amounts owed and your total monthly payments. You'll also need to supply your gross (before tax) monthly income so the lender can calculate your debt-to-income ratio.
Make sure that you provide the same information to every lender to get good quotes for comparing.
Compare Personal Loan Rates, Terms and Conditions
Custom offers are more useful than advertised loan rates.
But some providers may require you to submit a loan application to prequalify before they can give you a custom offer. This is because personal loan rates vary substantially, and the average personal loan interest rate has no bearing on what a lender is willing to quote you.
Here are the factors that affect your interest rate:
- Credit score
Because personal loans are generally unsecured, the lender's risk depends a great deal on your ability and willingness to repay the loan.
- Loan amount
Loans between $10,000 and $25,000 come with the lowest rates, while larger amounts are slightly higher. Loans under $10,000 carry higher interest rates on average.
- Loan term
Interest rates rise as the term lengthens. On average, rates for two-year terms run about 2.5% lower than those for 12-year loans.
Because these factors influence the rate you're offered, make sure that every lender you contact gets the same information from you.
Here are the elements of a personal loan offer:
- Interest rate
- Is the loan fixed or variable and, if variable, how will it adjust over time?
- Is there a prepayment penalty?
- Up-front loan costs
- Late fees
- Are you required to set up automatic payments?
Personal loans are very simple products and the answers to these questions should be easy to find.
What Is the Personal Loan Annual Percentage Rate (APR)?
When a lender advertises or offers a personal loan, it must by law also disclose the loan's annual percentage rate, or APR. The APR is a way to state the total cost of financing - including the interest and other loan costs - and is expressed as a percentage.
APR disclosure is required to make shopping for a personal loan easier. Otherwise, how would you know which is the better deal - a five-year $10,000 loan costing $500 up front and with a 6% interest rate, or the same loan with no fees and a 7% interest rate? What if you learn that the first loan's APR is 8.15%, while the second loan's APR is 7%? Doesn't that make it easier?
However, APR has some limitations:
- You can only use it to compare loans with the same term.
- It is only accurate if you keep the loan for its entire term and don't expect to prepay it.
But if you abide by those two rules, you can say that the loan with the lower APR is the cheapest one.
How to Lower Your Personal Loan Costs
You don't want to pay any more than necessary for personal loan financing. To minimize costs, follow these tips:
- Check your credit report and score before applying, so you can correct any errors. You'll also be able to provide an estimated score to each lender when you shop for quotes.
- Narrow down the list of possible lenders to those that market to borrowers with your profile and offer what you're looking for.
- Don't apply with too many lenders or authorize too many inquiries. Every "hard pull" of your credit knocks about five points from your credit score. And a lower score could result in a higher interest rate.
- Don't borrow any more than you need and can repay comfortably. Less borrowing equals lower costs.
- Borrow for the shortest term you can afford. Every year financed adds another 12 payments to your total cost.
- When shopping for a personal loan, compare the annual percentage rate for loans with the same term, and choose the offer with the lowest APR.
Personal loans are less common but much easier to understand than mortgages, credit cards or even auto financing. You should have little trouble obtaining offers, choosing the best product and applying for a personal loan.