Doing your homework can mean getting the best deal on a personal loan. Here are the most important things to pay attention to.
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If you’re taking out a personal loan, you want to make sure that you get the best deal possible from your lender. After all, borrowing money always comes at a price, but the lower the total cost of your loan, the easier it will be to become debt-free.
Finding the right loan for you isn’t always as simple as it seems, though, because there’s a lot to think about when deciding which lender to borrow from. To make sure you choose the very best loan for your situation, be sure to follow these five tips when you’re comparing loan offers.
1. Get quotes from at least three different lenders -- and preferably more
There are a lot of different lenders that offer personal loans. This includes online-only lenders, local banks, national banks, and credit unions.
Because there can be major variation from one lender to another in terms of interest rates, repayment timelines, fees, and the time it takes to fund loans, it’s imperative you get multiple quotes when you are shopping for a loan. You should aim to get a minimum of three quotes from different lenders, but preferably more if you can, so you don’t miss out on a better loan offer.
Choose different kinds of lenders too, as online banks often have lower rates and easier qualifying requirements than local banks and lenders because they have less overhead.
2. Look for lenders that allow you to compare loan offers without hard credit inquiries
When you apply for financing, sometimes this means a hard inquiry is placed on your credit report. But too many hard inquiries can hurt your credit score -- and inquiries stay on your credit report for up to three years.
The good news is many lenders -- and many online loan comparison tools -- allow you to get pre-approved for personal loans and to find out your rate and terms before a hard inquiry goes on your record. You provide your Social Security number and other basic information, the lender does a soft inquiry, then you find out what interest rate you qualify for. At this point, you can decide if you want to move forward with the lender and have a hard inquiry placed on your report.
By primarily or exclusively shopping with personal loan lenders that make it easy to comparison shop with soft inquiries, you can protect your credit score while finding the best deal on financing.
3. Make sure you’re always comparing apples to apples
When you’re comparing loan offers from multiple lenders, it’s imperative to make sure that the offer you’re looking at from one lender is actually similar to the offer from another.
If one lender is offering a lower monthly payment, but you’ll be paying for a year longer, you may end up paying more in total for a loan from the lender that has payments that appear cheaper at first glance.
Another key thing to look at is whether both lenders are offering you fixed rate loans. Loans with a variable rate generally have a lower starting interest rate than fixed-rate loans. The loan may seem like a better deal because of this lower rate.
However, you’re taking on much more risk with a variable rate loan because the rates on your loan could rise during repayment. When the rates rise, total loan costs go up and monthly payments do, too.
There are situations where a variable rate loan makes sense, especially if you plan to pay the loan off early and if you can afford higher payments. But you want to know you’re comparing loans with the same type of interest rate structure so you can get the best deal for either the fixed or variable rate loan you end up taking out.
4. Look at total costs
Because you want to keep borrowing costs as low as possible, it makes sense to look for the loan offering the lowest total overall costs -- including fees and interest rates.
When you compare rates, compare the annual percentage rate (APR) and not just the interest rate. The APR takes fees into account to show you what total rate you’ll pay per year for borrowing the money.
Your lender should also be able to provide you with information on the total interest you pay over the life of the loan. This will be affected by your payment timeline as well as by how often interest compounds.
Knowing the total interest you’ll pay can help you choose the loan that will cost you the least in the end -- rather than focusing just on monthly payments or annual interest rate, which can paint a misleading picture if one loan has a longer loan repayment term or has more fees than another.
5. Read the fine print
You’ll also want to read the fine print for any loan you consider to find out all of the little details that could result in added costs.
Some lenders charge prepayment penalties, for example, so you’d end up paying more for that loan if you wanted to pay it off early than you might for a comparable loan without a prepayment fee. Or some variable rate lenders may adjust rates more often than others, which increases your risk of rates rising frequently during the repayment term.
You want a complete understanding of your loan so you’ll know all of the risks and potential charges you could incur. Only then can you make a fully informed choice about which lender is actually best.
Comparing loans the right way is worth the effort
Taking time to compare loan offers -- and making sure you do a fair comparison -- is important, as some lenders offer significantly better deals than others. You don’t want to pay more to borrow than you need to, so make sure you follow these tips when you shop around for your loan.
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