Personal loans, which can be used to pay for medical bills, high interest credit card debt, or a home renovation project, may vary in fees, interest rates, and terms. These variations depend on the lender, your credit score and income, and what’s most important for your specific situation.
Shopping around for a personal loan may feel like you’re comparing apples to apples, but when you know what important features to compare, you can confidently make the best decision.
Here are important loan features to compare and think about as you’re searching so you can avoid pitfalls and be best prepared for the application process and funding.
1. What to look for when securing a low interest rate
The interest rate is essentially what it costs from the lender to borrow money. Since the lowest interest rates may reduce the cost of your loan over its lifetime, this is most likely at the top of your mind.
Your credit score and financial history may be two components of qualifying for a lower interest rate, but it also depends on the lender or lending platform. For example, Upstart can factor in your educational history and income during the application approval process.
When comparing different interest rates, pay attention to whether it is fixed or variable.
- A fixed rate won’t change over the life of the loan: It’s best if you’re on a budget and want the predictability of a set monthly payment each month.
- A variable rate may change and possibly increase or decrease: This option may make sense if you know you can pay the loan back fairly quickly and the interest rate happens to be low when you secure the loan. It’s also beneficial if rates are expected to fall.
When checking interest rates, be sure to also look for rate discounts or special deals with the lender. Rate discounts, often around 0.25 to 0.5 percentage points, may seem small, but can add up over the length of your loan. Some lenders may offer this discount if you set up automatic payments.
Banks or credit unions may give you a slight discount if you have a checking or savings account with them and bundle other products, such as an auto loan or credit card.
Pro tip: If you’ve pre-qualified online (checked your rate without affecting your credit score) with a lender, you could take that rate back to your bank and ask them to match that rate or negotiate a lower rate.
2. The length of the personal loan
Personal loans usually have a repayment term of one to five years, but certain lenders may offer a longer, extended loan period to seven years, for example. Keep in mind that a longer term may result in lower monthly payments, but the interest you’re paying could result in a more expensive loan.
However, if the lower monthly payment appeals to you, a longer term may work for you. Another factor to consider is that a longer loan term may give you the time you need to pay off other debts or get your finances in order. Once that happens, you could increase your monthly payments or decide to pay it off.
If this is part of your plan, ask the lender if they charge any prepayment penalty fees if you pay off the loan before the term is over.
On the flip side, a longer term loan means this recurring payment will be a part of your monthly bills for years. A job loss or sudden financial crisis could affect your ability to pay.
Pro tip: It never hurts to ask more questions about “what ifs.” Ask lenders what would happen if you missed a payment or if you had an emergency or income loss. Some financial institutions may be willing to provide flexibility for payment deferrals or forbearance, for example.
3. Always ask about fees
In addition to the interest rate, there are fees that may come with taking out a personal loan. The higher and more frequent these fees, the more expensive the loan. Fees may also add up over time and since various lenders charge differently, look out for the following:
- Origination fees: An upfront fee for processing your loan and can range from 1 to 8 percent. This fee is typically removed from your funds before it reaches your bank account, if you opt for direct deposit. For example, a $5,000 personal loan with a 1 percent origination fee means $50 would be removed from your funds and you’d receive $4,950.
- Prepayment penalty: This is the fee for paying the loan off before the term is over.
- Late-payment fees: The amount a lender will charge you if you make a late payment.
Pro tip: Use a personal loan calculator to compare the interest rates, and add in the fees so you can understand what the true cost of the loan will be.
It’s not just about interest rates
Try to get quotes from at least three to five lenders, including digital lenders, lending platforms, community banks, national banks, and credit unions. This may help you understand what kind of rate you may qualify for and the fees they may charge.
Here are a few other factors that may sway your decision to go with a certain lender or bank, including:
- The time it takes to fund the loan: Is it within 24 hours after approval or does it take several business days?
- Customer experience and service: Is there a real human you can call and speak with in order to get your questions answered? Or do you have to submit an email and wait for a response?
Affordability is likely a top priority for you, but there are other factors to weigh in, such as discounts, fees, loan flexibility, and funding timeline.
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