How to compare loan offers to get the best deal for you

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In a Nutshell

Personal loan terms and costs can vary widely from lender to lender. To find the best deal for you, compare interest rates, fees and terms before you make a decision.

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Ready to bring your bathroom into the 21st century with a remodel? Or do you need to consolidate credit card debt? A personal loan may be able to help you.

Personal loans are installment loans, meaning you borrow a certain amount of money and pay it off in set amounts over a period of time. You can apply for a personal loan with a bank, credit union or online lender.

Whether you’re shopping for a new personal loan or want to refinance one, you’ll want to compare loan offers before signing on the dotted line. Here are some important loan terms to compare to help you find the right loan for your budget and circumstances.


Loan terms to compare

When you’re borrowing money, you want to find a loan that meets your needs at the most-affordable terms. When comparing lenders, here are some of the loan terms you’ll want to review.

Interest rate and APR

The interest rate on your loan is a percentage of the total amount you’re borrowing and has a significant impact on its cost.

You may also see an annual percentage rate, or APR, in your loan offer. The APR includes the interest rate plus loan fees, which can give you a better sense of the loan’s true cost.

You’ll also want to pay close attention to the interest type: Is it fixed rate or variable? A fixed interest rate can stay the same during your loan. A variable rate can change — and possibly increase — during your loan term.

If you have good credit, you may qualify for competitive rates and terms — that’s because lenders consider you to be a less-risky borrower. If your credit scores aren’t great and you’re not in a rush to borrow, consider working on your credit before applying. This may help you qualify for a more competitive rate.

How to find the best personal loan for you

Collateral

You’ll have to ask yourself whether you want to get a secured or unsecured loan. A secured loan is backed by collateral, like your home or car. But if you’re unable to pay a secured loan back, you may lose the property you used as collateral on the loan. An unsecured loan, on the other hand, doesn’t require collateral, so you don’t have to worry about potentially losing your property.

A secured loan may come with a lower interest rate than an unsecured loan, because the property securing the loan reduces the lender’s risk.

Fees

Before you sign any loan offer, you’ll want to check if the lender charges any fees — they can add up during the life of the loan. Here are some common fees to keep an eye out for.

  • Origination fee This is an upfront fee a lender may charge for processing your loan. Origination fees can range from 1% to 8% of the loan and are typically taken off the top of your funds. For example, if you borrow $5,000 with a 1% origination fee, $50 would go toward the fee, and you’d receive $4,950 in a check or bank deposit.
  • Prepayment penalty Lenders may charge prepayment penalties if you pay off your loan early. If you’re expecting a cash windfall or planning to pay off the loan ahead of schedule, check to see whether a fee will apply before committing.
  • Late-payment fee — If you have a hard time making payments on time, you’ll want to check if your lender charges a late fee.
  • Insufficient-funds fee — On a similar note, if your checking account often runs low, you may want to see if you’ll be charged an insufficient-funds fee. You could be charged such a fee for attempting to make a payment and not having enough money in your account to cover it.

Loan term

Lenders may offer short-term and long-term personal loans. Personal loan terms typically range from 12 months to 84 months, but certain lenders may offer an extended loan period. For instance, LightStream may let you borrow money for up to 12 years.

But a longer term isn’t always better. A long-term loan could result in lower monthly payments, but it may also mean paying more in interest over the long haul.

Monthly payment

Your monthly payment is the amount you pay each month until your loan is paid off. You’ll need to make sure it fits comfortably into your household’s budget so that you can eat and pay other bills while repaying debt. But the monthly cost doesn’t tell the whole story about the total cost of the loan.

The total amount

When you’re shopping for a personal installment loan, lenders should be able to tell you the total amount you’ll have to pay, including the loan principal plus interest and fees — though this excludes any late fees or insufficient-funds fees you may be charged.

A loan’s monthly payment doesn’t always give you a true picture of the actual cost. Getting a loan with a long term can lower your monthly payment, which makes a loan look cheaper — at first glance. But it can also result in an increase to your overall cost.

Say you want to borrow $10,000 for debt consolidation and you’re comparing two loan options.

Loan amount APR Loan term Monthly payments Interest paid
Loan 1 $10,000 6% 3 years $304.22 $951.90
Loan 2 $10,000 6% 5 years $193.33 $1,599.68

 

While your loan payment is less per month if you go with the loan that has a five-year loan term, you’ll end up paying more overall. When you’re comparing lenders, you’ll have to decide which is more important to you: a lower monthly payment or a lower total cost.


Bottom line

When you want to borrow money, shopping around to compare loan options will help you find the best personal loan for you. If you’re ready to start your loan search, consider looking at prequalification options.

Some lenders allow you to apply for prequalification by telling them basic details about yourself and your finances. Prequalifying lets you check potential rates and terms — often without a hard inquiry on your credit.

But prequalification is not the same as approval. You’ll still need to submit a full application for verification to find out if you’re formally approved and will receive official terms. But prequalification can give you an idea of what terms and fees may be available before you go through with an actual application.