Things to Consider When Comparing Personal Loans
Personal loans are handy in different situations. You can use this type of loan for financing anything from an emergency home repair to your next venture. Thanks to the growing credit market, you also have more options when it comes to the personal loans you can take out.
While there are some fantastic deals on the market right now, comparing financing options and settling for the one that suits you best are still necessary. There are a number of things you need to consider when comparing personal loans.
Start with Your Requirements
Before you look into different financing options and metrics like their APRs, you need to understand your financing need first. The more you know about how you will use the money and the kind of loan you are comfortable with the most, the better you will be when comparing the available options and spotting the best one to use.
For example, you may not need a long-term loan if you only want to fill the gap in your monthly budget until your next pay check. Rather than taking out a loan that extends for a couple of years, you can actually benefit more from using a short-term loan for a couple of weeks.
The same can be said for the amount of loan you need to take out. I know how tempting it is to take out the maximum amount. After all, you can use the extra money for other expenses, can’t you? Well, it is never that simple. Increasing your loan principal amount means increasing your monthly repayment amount as well as the cost of the loan itself, both of which you want to avoid.
Review the Total Payable
The first thing you want to review when you are comparing financing options is the total cost of using the loan. I said “total cost” because you need to know how much you have to pay, in total, for using the loan. The total cost of the loan should include interest rate and other fees you have to absorb while using the loan.
This is usually displayed as the total payable on loan comparison tools. You see the loan principal amount plus the total amount you have to pay for using the loan. Thanks to changes happening on the market, the total payable needs to be transparent to give consumers – that’s us – a clearer view of what to expect from the loan.
Reviewing the total payable allows you to measure the cost of using different financing options without taking the terms of the loan into account. Two loans can cost £200 to use, even when one is a personal loan with a minimum term of 12 months while the other is a 2-week financing.
Check the Representative APR
Now that you have a better view of the total cost of the loans, it is time to look into the Annual Percentage Rate or APR. This is the percentage of interest and charges you have to pay if you decide to use the financing option for a full year.
An APR of 10% means you will spend £1,100 in loan repayments when you take out a £1,000 loan for a full year. Lower APR reflects lower interest rate and charges in general. Once again, you have the competitive market to thank for the extra low APRs we now see from top lenders.
With a fixed term, APR can be extremely big for short-term loans. This is because you only use the loan for one or two weeks rather than a full year. Still, the APR is handy for comparing multiple short-term loans based on their representative APR.
Read the Agreement
The last thing to take into account when comparing loans is the loan agreement itself. You now know the cost of using the loan, but that doesn’t necessarily mean you know everything about it. Taking the time to go through the terms and conditions of the loan is absolutely necessary.
If you have questions about the terms, contact the lender directly and get clarifications. The goal here is to make sure that you are safe from less-than-ideal practices, including:
- Hidden fees
- Additional charges for repaying the loan early
- An interest rate bump when you decide to renew the loan
- The minimum payment amount only covering your interest rate rather than the principal
- And many more.
The better you understand the terms and conditions included in the loan agreement, the more responsible you can be with the loans you take out. At this point, you can safely apply for the loan and get the financing you need in no time at all.
Comparing loans is easy thanks to web tools available today. Now that you know how to compare the available financing options effectively, you can find the one that suits your financing needs best in no time.