How To Compare Personal Loans And Choose The Best Option For You
The main points
The average personal loan interest rate is around 11 percent.
Common fees include origination fees, prepayment penalties, and late fees.
Some lenders allow co-borrowers and co-signers to loan you.
Estimate the total cost plus other services and customer reviews.
To find the best personal lender for you, you'll need to shop around and compare options. Personal loans come with different terms, interest rates, fees, and customer support options, so knowing what you need from the start will help narrow down your options.
In many cases, you can borrow anywhere from $1,000 to $50,000 with a repayment period of up to seven years. Typically, annual interest rates range from 5 to 36 percent, depending on your credit score and other factors.
How to compare personal loans
Each personal loan provider has something distinctive to offer. Before applying for a loan, be sure to compare at least three lenders based on the criteria below to determine which one is best for your situation.
Approval requirements
Every lender has its own set of requirements for qualifying applicants. Most lenders will look at factors such as your credit score and income to determine your eligibility for a loan.
However, others may also consider your educational background and employment history. Researching the eligibility requirements before applying will help you narrow down your choices for those who make loans under your credit profile.
Interest rate
The average personal loan interest rate is currently over 11 percent. However, rates fluctuate from about 5 percent to 36 percent. The interest rate you get depends on your credit score and the term of the loan.
Lenders advertise low interest rates to attract customers. However, the lowest personal loan rates are usually reserved for consumers with excellent credit—usually 720 or higher—although a good credit score can provide you with competitive rates.
Co-signatories
You should expect to pay extra interest if your credit is less than flawless. Look for lenders that allow you to apply using a co-borrower or co-signer, as this can improve your odds of approval as well as the interest rate you receive. Not all lenders offer this option, so you'll need to do some research before applying.
If you still have a high interest rate after getting a participating site, you may want to work on your credit score before applying. A higher interest rate could mean paying thousands of dollars more over the life of your loan.
Fees
Be sure to look at any fees, such as application fees, prepayment penalties, or origination fees, as these can add to the total cost of the loan, even if you get a competitive rate.
Bad credit loans are likely to have higher prime charges. Some lenders charge as much as 10 percent of the loan amount, though this varies widely. All you have to do is make sure that you calculate the origination fee - which is deducted from the amount you receive - when you apply for a loan.
Loan amount
Lenders often offer personal loans ranging from $1,000 to $50,000 - although there are some lenders that offer personal loans of up to $100,000. For many people, this should cover almost any major expense. Larger loans are designed for borrowers with strong incomes and high credit scores and often have higher minimums - typically $5,000.
Check your lender's limit when applying because some may limit borrowers by as much as $20,000. While this may suit your needs, it should be a factor that you should consider when comparing lenders, especially if the lender charges a high origination fee.
Payment options
The time it takes to pay off your loan has a significant impact on how much the lender earns in interest. It may have a higher monthly payment for two years, but that means hundreds, or even thousands, of savings over the life of your loan.
A longer loan period does the opposite. If your lender offers six or seven year terms, you may be able to lower your monthly payment. However, you will also pay much more interest. Ideally, your monthly payment should be as high as you can afford to reduce the interest you pay.
Unique properties
Many lenders offer additional incentives to make the transaction easier for customers. For example, some lenders may offer free credit score monitoring, credit reporting, or online privacy protection services in addition to self-pay waivers and unemployment protection.
Customer service and expertise
Some lenders only have email forms for submitting questions, while others have phone and chat options. If you are looking for a personal loan from a bank or credit union, you may also be able to get a personal visit at a local branch.
In addition to looking at contact options, check creditor history on consumer review sites, such as TrustPilot and the Better Business Bureau (BBB), to determine if doing business with them is a good idea.
Types of loans offered
Personal loans are either secured or unsecured with variable or fixed interest rates. Many are sold for a specific purpose, including:
Lenders offer bad credit loans to pre-existing credit-challenged consumers.
Debt consolidation loans allow you to pay off multiple debts with one new loan, usually at a lower interest rate, and simplify the repayment process by making a single monthly payment.
Emergency loans are given for handling unexpected expenditures and financial problems that arise at the last minute.
Home renovation loans are used to make expensive upgrades to your home without the benefit of the capital you have built up.
How to choose a loan
There is no one-size-fits-all personal loan. The best personal loan for you depends entirely on your finances and the type of loan you qualify for.
Narrow your choices based on your qualifications and the factors that are most important to you. The interest rate, loan amount, and fees are all factors to consider.
Apply for pre-qualification with each lender. This allows you to see your rates without hurting your credit and makes it easier for you to compare your options.
Review the lender's terms. One lender may outperform the other in terms of interest rates, but there may be prepayment penalties that make it difficult to pay off your loan ahead of schedule.
Complete the full application to confirm you are eligible. If you do, the lender will sign the final papers before paying off the loan.
Before applying for a loan, do the numbers to ensure that you are making an informed decision. Principal fees or higher rates do not mean that the lender is not worth the attention. A personal loan from a lender that is not reputable or offers minimal customer service can be more expensive.
Why is it important for lenders to shop around?
In the end, the best personal loan depends on the reputation of the lender and the loan terms they offer. Although your credit score and overall financial history will determine whether you qualify for a loan, get quotes from several lenders to assess rates and fees. With research and time, you can find a lender that is ideal for your financial situation.
