4 Shopping Tips For Personal Loans

personal loans (photo credit: PR)
personal loans
(photo credit: PR)
 From paying off debt to buying upgraded appliances for a home, personal loans serve a wide variety of purposes. With interest rates on personal loans being lower than many credit cards, more consumers are choosing these loans to meet their needs and help build their credit. It is important to know what to look for when finding a loan. Here are the top four personal loans tips to remember.

1. Shop Around

Lenders come with their own criteria for interest rates, terms and payments. Shopping around can save a person hundreds of dollars over the life of a loan. Several major financial websites provide free loan estimation tools. Potential borrowers can quickly compare personal loan providers that they are likely to be approved with based on credit score. Also, these sites compare different types of personal loans. These are some examples to research:

  1. Traditional loans
  2. Peer-to-peer loans
  3. Secured loans
  4. Unsecured loans
  5. Fixed-rate loans
  6. Variable-rate loans
  7. Short-term loans

2. Keep An Eye On Fees

Many people do not fully grasp the impact of origination fees. With most types of personal financing, the fees are rolled into the loan and actually increase the final percentage rate. This could make one lender's slightly higher percentage rate a better deal than another lender's lower percentage rate if the lender with the higher rate offers a lower fee.

For example, imagine that two lenders offer the same loan term of 36 months. If Lender A offers a loan with 5.32 percent and a $40 fee but Lender B offers a loan at 6.99 percent with a $25 origination fee, Lender B would be the most cost-effective choice in the end when the loan fee is calculated into the small personal loan.

3. Choose The Right Term

Look beyond monthly payment amounts. In many cases, it is better to get a two-year loan with a higher monthly payment than a five-year loan with a smaller payment. Look at the total cost of interest paid for the life of the loan, and be sure to factor in fees. Many people can cut a few expenses such as magazine subscriptions, extra cable channels or other costs out of the budget to accommodate a slightly higher monthly payment that could save hundreds of dollars in the end.

4. Be Careful Of Scams

With the popularity of online lending growing daily, more scammers are taking advantage of financial technology. There are plenty of sites posing as banks, P2P lenders and low-cost lending platforms. Do some research on unknown companies, and watch for lenders with names or URLs that are similar to well-known financial companies.

With these personal loans tips, keep in mind that multiple credit inquiries will temporarily lower a score. Consumers should only apply for loans when they are ready to accept an offer instead of comparing lenders months before they plan to accept one.