Personal loans are the less controversial cousin to the now infamous mortgage loan. The personal loan carries a much smaller principal and a shorter loan term than the mortgage. Approval is also easier to obtain for these loans and the payments are a fraction of the typical mortgage payment. Despite these advantages, a personal loan is a still a loan, one that requires research and consideration before signing the on the dotted line. One of the most important things to consider is the question, “How do I know when a personal loan is a good fit?”
In truth, each person’s financial situation and personal lifestyles dictate the right fit for personal loans. However, there are five universal things to consider first.
1. Secured or unsecured?
The most important decision will be between the secured or unsecured loans. The biggest defining factor is that the secured loans require collateral (a monetary deposit or assets) and the unsecured loan does not. There is more. Secured loans usually have lower interest rates, leading to lower payments due to the reduced risk that the bank has to take on with the loan. Unsecured loans are secured by the bank’s faith that you will make the payments. Unfortunately, this type of faith equals higher interest rates and payments.
Another big difference between secured and unsecured personal loans is the credit requirements for obtaining them. Unsecured borrowers must have a good credit score to help bolster the bank’s faith that you will pay back the loan. Secured borrowers provide collateral that is of sufficient value to cover the loan if the borrower defaults, or fails to make the payments. Again, the bank has less risk in a secured loan and thus offers these to borrowers with bad credit.
2. Compare the Rates
Yes, you must compare interest rates before signing for a loan. Did you know that some lenders advertise monthly interest rates instead of the annual rates? According to the financial resource Bankrate.com, the banks charge interest rates yearly, no matter what the advertised method is. Monthly interest rates are always lower than the annual rates, so be wary of advertised interest that is much less than the competition. Unsecured borrowers with bad credit can expect higher payments than those with good credit.
3. Think about Your Payment
Personal loan payments are much less than a mortgage payment because the loan principal is considerably smaller, anywhere from $500 to $10,000 or more. This isn’t the only determination of payment. Higher interest rates mean higher payments, as do shorter loan terms. Want to keep the payments low? Take out a smaller loan and extend the loan term. Secured loans also have lower payments than the unsecured loans, so consider ponying up some collateral.
4. Hidden Fees
According to the U.S. Treasury, every lender must offer Truth in Lending statement on all loans. This includes personal loans. This statement outlines the terms of the loans, rates, and fees that the consumer can expect. Look carefully at the fees. Non-bank lenders are notorious for charging excess fees for loans. If you are charged an upfront fee for the loan, walk away. This loan is not the right fit for you.
5. Review the Terms Carefully
Some personal loans have penalties for early payoff – you pay the bank for the privilege of paying the money back early. The interest rate may fluctuate, or payments may change after a certain period of time. Look at the terms carefully before committing. Make sure that the terms fit your financial needs.
Above all, remember that the Internet and phone are gateways to a wide variety of banking options for your personal loan. So, stick to your standards. Figure out how much you can pay as the kind of loan and terms that you will be able to handle. Keep searching until you find it.
This article was written by Peter Puckett who helps run and maintain PersonalLoans.org, which is a website that teaches you about the best ways to obtain personal loans by giving advice and providing tips.