You’ve researched a few different financing options and settled on a personal loan, but your work isn’t done yet. The next step is to decide which personal loan is best for you.
Affordability — a low rate and monthly payment that fits your budget — should be a top priority. But when you have two or more competitive loan offers, weigh features like discounts, funding time and payment flexibility to break the tie.
Here are seven features of personal loans to look for when comparing personal loans.
1. APR
Annual percentage rate, or APR, shows you the full cost of a personal loan. It includes both of the following:
- Interest, which is a charge for borrowing money. Part of your monthly personal loan payment goes toward repaying the principal amount you borrowed, while the remainder goes toward interest.
- Origination fee, an upfront fee that some (but not all) lenders charge. A typical origination fee is 1% to 10% of the loan amount. It’s often subtracted from the loan before you get it, though some lenders may include it in the monthly payments.
Comparing APRs will show you which loan costs the least. Most personal loan APRs are between 6% and 36%.
2. Other fees
Some lenders charge other fees that aren’t included in the APR, including:
- Late fees. You’ll often owe a late fee if you don’t make your monthly payment by the due date, though many lenders offer a grace period of around 15 days. Your lender may charge a percentage of the past-due payment (usually 5% to 10%) or a flat fee (about $10 to $40).
- Non-sufficient funds fee. Your lender may charge this fee if your loan payment is rejected because you don’t have enough money in your bank account. A typical non-sufficient funds fee is around $20.
- Prepayment fee. Lenders make money by charging you interest over the life of the loan – and they earn less when you pay off a loan early. Some lenders recoup this lost revenue by charging a prepayment penalty. These charges are more common with mortgages and auto loans than with personal loans. Lenders may assess this fee as a percentage of your remaining balance (such as 1%), a flat fee or a specific time period’s worth of interest (like six months or a year).
Some banks and online lenders that work with good- or excellent-credit borrowers (a credit score of mid-600s or higher) will have zero fees, including late and non-sufficient funds fees.
3. Rate discounts
Rate discounts are small perks that can add up. Many lenders offer to reduce your rate by a small amount — often 0.25 to 0.5 percentage points — if you set up automatic payments.
Other lenders may reduce your rate by a percentage point or more on a debt consolidation loan if you let them directly pay off your debts instead of depositing the money into your bank account. Banks often provide discounts to existing customers.
Pre-qualifying for a personal loan lets you check your rate without hurting your credit score. Pre-qualify with multiple lenders to compare rates and find the best offer.
You could potentially use the rate an online lender quotes you to negotiate a lower rate at your bank, says Tyler Smith, a CFP with BBK Wealth Management in the Indianapolis area.
“Especially if you’re in a position where you have good credit and good payment history, they will do anything that they can to get you to borrow money,” he says.
4. Funding time
Personal loans can help you cover urgent expenses, like a roof repair, because they’re typically funded in under a week — and sometimes even faster.
For instance, online lender LightStream says applications submitted before 2:30 p.m. ET on a business day with all the necessary documentation may be approved and funded the same day. Other lenders can approve and fund a loan within another day or two.
A tip to keep things moving: Gather documents required for a personal loan, like W-2s, pay stubs and proof of address, before you start an application.
5. Loan term and monthly payment
Your loan’s repayment term factors into the size of your monthly payment. A longer term can result in lower monthly payments but more interest paid overall. Use a personal loan calculator to see how different loan terms affect the monthly payment.
Choose a timeline that gives you affordable monthly payments while still keeping interest costs low. Some lenders offer loans with terms of two years or less, while others let you repay your loan over terms of five to seven years or longer.
6. Lender flexibility
A lender may let you flex payments to meet your needs during repayment. For example, a lender may let you move your payment date throughout the life of the loan, which can be helpful if you change jobs and have a new payday.
Other lenders let borrowers pause or lower their payments if they can show they’re dealing with financial hardship. If flexibility gives you peace of mind, ask your lender about their options for borrowers experiencing tough times before signing the loan agreement.
7. Customer experience
Customer experience isn’t as easy to quantify as origination fees and rate discounts. However, gauging how things will go once you have the loan could save you from future headaches.
Choosing a lender that lets you set up automatic payments or link your account to a budgeting app could minimize some of the hassles of managing personal loan payments.
Subjective reviews from friends and previous customers and objective online reviews can surface issues you may not see before you borrow.
Find out what problems other borrowers have encountered by searching for the lender in the Consumer Financial Protection Bureau’s complaint database or Better Business Bureau website.
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