How to know if a personal loan is good or bad. We will walk you through 10 things to look at.
10 things to look at when deciding if a personal loan is good or bad for you.
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Video Timeline: 10 things to look at when deciding if a personal loan is good or bad for you.
00:00 - Intro
01:09 - Payment amount
01:30 - Interest rate
02:10 - Total interest expense
02:36 - Loan term
03:07 - Origination fee
03:32 - Fees
04:07 - Payment flexibility
04:38 - Collateral
05:16 - Discounts
05:37 - Loan use restrictions
05:54 - Summary
06:11 - How to get the best personal loan that you can
06:41 - Where to go to shop around for a personal loan
07:34 - Comment, Like, Subscribe
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Payment Amount
Make sure you know what your total monthly obligation will be and that you can afford that in your budget. Pay particular attention to the frequency of the payments. Some loans have monthly payments, others have bi-weekly payments, and others have payments twice a month. Knowing exactly how much will be expected of you is the first, biggest, question.
Interest rate
The loan’s interest rate will probably be represented as an APR, or annual percentage rate. By law, a lender must calculate the APR a certain way and they must present it to you in a certain way. This is so you can compare loans with each other. Personal loans tend to have fixed interest rates and revolving credit like credit cards and lines of credit tend to have variable rates. Compare the APR with other offers you’ve been approved for.
Total interest expense
All legitimate lenders will not only tell you what the APR of the loan is, they will tell you the total amount of interest you will pay over the course of the loan. That total amount is really important. You can end up paying more in overall interest even if the loan you selected has a lower interest rate. That can happen if you select a loan with a longer term.
Loan term
The loan term, or the repayment period, will have implications on how long you are in debt as well as how much interest you end up paying. A longer repayment term will mean a lower monthly payment, but higher total interest paid. You should always take the lowest term length that you can comfortably afford.
Origination fee
An origination fee on a personal loan is usually a percentage of the total loan amount. It is taken out of the proceeds of the loan. The origination fee is accounted for in the APR, so a low APR with an origination fee just means that the interest rate is lower. But, you won’t get a reimbursement on your origination fee if you pay the loan off early, so it’s nice to have a low origination fee to incentivize paying the loan off early.
Fees
Most lender charge a late fee, but the cost can range from $10 up to $39. And some lenders have grace periods. Some lenders also have non-sufficient funds fees that they will charge you if they attempt to take a payment and it fails because you don’t have enough money in your account. If you are looking at a line of credit, you will also want to see if there are any account maintenance fees.
Payment flexibility
See if the lender offers options for changing your payment date or skipping a payment during financial hardship. A lender that has policies in place for flexibility can make repaying the loan much easier and keep a new financial emergency from creating a domino effect on the rest of your finances. If you are someone with a variable income that can change month-to-month, payment flexibility could be very important to you.
Collateral
If your loan is secured, try to understand what kind of claim that the company can make on your collateral. Will they repose the collateral? Foreclose? Put a lien on the property? Securing a loan can put your collateral at risk if you run into additional trouble. However, it’s important to recognize that putting up collateral can make it easier to be approved, get approved for more money, or score a lower interest rate.
Discounts
Some lenders will offer APR discounts, but only if you trigger the requirements before you accept the loan. The most common discount like this is a discount for signing up for autopay. If you sign up for autopay after you accept the loan, you don’t get the discount.
Loan use restrictions
Most personal loans put no restrictions on how you can use the funds. However, some lenders do. Common restrictions include business use or higher education tuition. You will want to make sure you understand all of the restrictions on the loan, especially if you already have a specific purpose for the money.