Interest alone does not determine if a personal loan is right for you.
- Many people focus primarily on interest rates when looking for the best personal loan.
- Other factors, such as repayment term and upfront costs, contribute to the total cost of the loan.
When you apply for a personal loan, you will notice that you have many lenders and loan terms to choose from. You’ll want to choose the right loan to make sure your debt is affordable and that taking out the loan is a smart financial decision rather than one you’ll end up regretting.
While many people focus primarily on the interest rate of the personal loan they are taking out, the rate is not the only key factor. Here are a few other things to consider when deciding which loan option is right for you.
One email a day could save you thousands
Expert tips and tricks delivered straight to your inbox that could help you save thousands of dollars. Sign up now for free access to our personal finance boot camp.
By submitting your email address, you consent to us sending you financial advice and products and services which we believe may be of interest to you. You can unsubscribe anytime. Please read our privacy statement and terms and conditions.
What is the loan repayment term?
The two main factors that influence the total cost of your loan are your interest rate and the repayment period. Obviously, a lower rate reduces what you’ll pay over time. But the same goes for choosing a loan with the shortest repayment period.
If you extend your repayment term for a long time, even a low rate loan could end up costing more than an alternative option with a shorter repayment period but a higher rate. It just happens because you end up paying interest for a lot longer.
Of course, the advantage of a long repayment term is that the monthly payments are much lower than those of a loan with a shorter repayment term. You’ll need to consider whether it makes more financial sense for you to pay off your loan as soon as possible to save on total costs, even if that means paying more each month, or whether you’d rather go for affordable monthly payments even if it means incurring no more interest charges over the life of the loan. A personal loan calculator can help you better understand your options.
What initial fees will you have to pay?
Many personal loans don’t charge an upfront fee, but some come with origination or application fees that can cost you dearly. You need to take this into account when thinking about the total cost of the loan. If a lender offers a low rate but charges a high upfront fee, you may want to look elsewhere to borrow.
Can you qualify for the loan?
You should also review the lender’s eligibility requirements, as there is little point in applying for a loan that you cannot be approved for, even if they advertise a competitive interest rate.
Different lenders cater to different types of borrowers, with those offering the best terms generally requiring better credit and strong financial references. Be sure to apply to a lender looking for borrowers like you.
Are there prepayment penalties?
Finally, you’ll want to make sure the loan you’re considering doesn’t charge a fee to prepay it. If your lender charges a prepayment penalty, you could find yourself in a situation where you have the funds to pay off your debt, but must choose between keeping the loan and continuing to pay interest or paying high fees to get out of debt. your loan. early.
By considering all of these different factors, you can make sure you get the personal loan that’s right for you. Each of these factors matters as much as the interest rate, so look at the big picture before applying for a loan that you’ll likely spend years repaying.
The Ascent’s Best Personal Loans for 2021
The Ascent team has scoured the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need extra money to make a big purchase, these top picks can help you reach your financial goals. Click here for the full rundown of The Ascent’s top picks.