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10 Key Things to Consider Before Getting a Personal Loan
There comes a time in just about everyone’s lives when we could use a personal loan of one form or another.
Although personal loans may have been shunned in years past, they are currently undergoing a resurgence as consumers realize they can get a better rate on a personal loan than on a credit card.
Whether it’s to finance a home improvement project, consolidate your credit card debt, or invest in a new business venture, a personal loan can help you cover your immediate expenses without breaking the bank. And with a good credit score, you’ll likely be able to snag the most affordable interest rates, too.
Whatever the reason is, getting a personal loan can give you the money you need and can provide you with a little extra cash to help you meet your goals. But actually securing that personal loan can be a bit difficult and a confusing process, with many people not knowing where to begin.
Here are some things to consider while searching for a personal loan:
1. Shop around for the right lender.
As with any financial product, when it comes to taking out a personal loan it pays to shop around Financing sources that offer personal loans include banks, credit unions and online lenders. Each of these offers a range of interest rates and their terms vary, which is why you should shop around and find a lender whose loan best fits your particular needs, whether its credit card debt consolidation, a home improvement project, a business investment, or simply for a vacation.
2. Compare the TAR, not the APR.
The annual percentage rate or APR is meant to be a standard way of comparing the “true” cost of a loan over a year by taking into account the interest payable. However, the APR can be manipulated by the lender, so the best way to compare the cost of a loan is to look at the total amount repayable or TAR. This is the total cost including interest and charges that you will pay from your first payment to your last. You should also ensure that you can afford the monthly payment.
3. Check the fine print.
Before you apply for a loan, check the small print to see if you’re eligible. Some best buys come with some tedious conditions. Also be sure to ask for a full disclosure of all the loan terms, as there are differences in the terms offered by different lenders. Make sure monthly fees and fees for late payments work for you.
4. Think about early repayment charges.
In addition to considering monthly and late payment fees, it’s important to also think about repayment charges. Although it may seem unlikely at the time when you’re taking out a personal loan, you can’t forget that it’s possible that you will be able to pay off your debt early. The lender is looking to generate a steady stream of interest payments from you over the term of the loan, so many loan providers apply a charge or penalty fee for paying off your loan early. As such, it’s a good idea to check how much paying off your loan early might cost before you apply for a particular deal. If you think there is a good chance you will want to settle your loan early, it may be worth searching for a deal that comes without any early repayment charges.
5. Check your credit score.
If you plan to apply for a personal loan, it’s crucial that you check your credit rating first. Your credit score could make for a significant difference in the interest rate you’re offered on your personal loan, regardless of the overall direction of interest rates. If your credit rating is not in good shape, you may be offered a more expensive deal than the low rate loan you originally applied for. For instance, you could pay as much as 20% or higher with bad credit, while you could snag a much better 8% rate with good credit.
6. Figure out what you can and cannot afford.
The longer you have a loan out, the more interest you pay. So before you apply for a personal loan, gauge your financial situation and how much you can comfortably, and reasonably, afford and take on. If you do not already have one, set-up a budget to figure out how much you can pay each month. Once you have determined your monthly amount, try to get a loan agreement that allows you to pay back the loan as fast as you can without going over your budget.
7. Shop around for PPI.
Payment protection insurance (PPI) is a useful loan addition for some people. It’s designed to cover your monthly loan or credit card repayments if you are unable to meet them due to sickness or unemployment. If you decide you need this type of protection, it’s vital you shop around for the cheapest deal. Most often, buying a policy direct from your lender could cost you far more than buying from a standalone provider. Furthermore, PPI policies often come with a long list of exclusions, so make sure you fully understand what is, and is not, covered before committing to a policy.
8. Watch out for origination fees.
While some lenders seem to offer lower interest rates, you might find that they also tack on an origination fee that effectively hikes your interest rate. Thus, you could be better off with a lender that offers a higher rate than others but doesn’t add on any origination fees. When comparing loans, make sure you include the origination fees charged by all options you are considering.
9. Know the different risks associated with secured versus unsecured loans.
Most personal loans are unsecured, which means you aren’t putting up your house or car as collateral. But that lack of physical backing makes you more of a risk and, as a result, the interest rate you pay on a personal loan is often higher than on a secured one. But while an unsecured loan has a slightly higher interest rate than a secured loan, it allows you the freedom to borrow money without collateral.
On the other hand, secured loans are cheaper than unsecured loans but you run the risk of losing your home if you don’t keep up repayments. So don’t sign-up for a secured loan unless you’re 100% sure that you will be able to meet your repayments.
10. Be aware of personal loan scammers.
As more and more lenders enter the personal loan arena, the opportunity for scammers to cash in on unsuspecting victims also increases. If you’re applying for a loan online, it’s best to be careful about who you give your personal information to.
Some of the signs that may indicate that a personal loan agreement is actually a scam include lenders who use overly pushy sales tactics to get you to commit or ask you to put up a deposit as a guarantee against the loan. If you come across a lender who doesn’t seem concerned about checking your credit or tells you they can give you a loan without doing any paperwork, those are big red flags that the lender may not be legit.
Taking out a personal loan can be a big decision to make, and applying for one can be a bit stressful. However, getting a loan can be a huge help when you need it. Considering the 10 points mentioned above will ensure you are armed with all the necessary tools you need to make the right decision for your specific needs so you can be confident you are on the right path to achieving your financial dreams.
And even though you may feel like you are at the lender’s mercy, you really are not. You are the consumer and if a lender wants your business bad enough then that lender will work with you to come up with a good loan deal.
If you are considering applying for a personal loan, here are some additional resources that will help you find great deal on a personal loan that’s right for your specific financial needs and goals.