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How to Choose the Right Personal Loan to Suit Your Needs
Need some extra cash, but aren’t sure where to start? Here’s everything you need to know about how to choose the right personal loan to suit your needs.
As of 2018, there were 36.8 million outstanding personal loans in the United States. Together, these loans amounted to a whopping $291 billion of debt.
Sure, this implies that lenders are more confident that consumers can pay back their dues. This also signals that consumers feel more positive about their finances.
Still, 27% of consumers say that they’d need to borrow money for an unexpected $400 expense. Moreover, one in four adults who skipped medical care because they couldn’t afford it.
If you’re in a financial pinch, your needs may be serious enough to warrant a personal loan. Securing a loan is better than skipping crucial medical care. It may also be better than missing a mortgage or rent payment.
This doesn’t mean you should sign the contract of the first loan offer you receive though. The wrong loan can make your finances worse, so it’s best you know how to choose the best one for your urgent needs.
Ready to secure the right loan from the right lender? Then let’s dive right into it!
Decide on How Much Money Is Enough for Your Needs
While this may seem obvious, some people tend to borrow more than what they need and can afford to pay back. Some are also in debt because of their “wants”. In fact, in 2017, 22% of US consumers said that their credit card debt was due to clothes shopping.
That said, make sure that you first list down what your actual needs are. This is also a good way to filter your “needs” from your “wants”.
Maybe you’re in dire need of cash because you won’t get your salary in time to pay your mortgage, rent, or utility bills. Or you have serious roof leaks that you need to repair ASAP to avoid further water damage.
Whatever your needs are, list their costs down and rank them based on importance and urgency. Then, add them up to come up with an estimate of how much you really need to borrow. You can borrow a little more than the total, but make sure you can still afford to pay it back.
Take Time in Researching Your Loan Options
In a recent U.S. News survey, 26.6% of 822 respondents said they didn’t do any kind of research on their loan options. Another 31.3% said they only spent one to two hours researching their choices.
If you skip this crucial step, you’re likely to miss out on loan offers with low-interest rates. If you take the first offer right off the bat, you won’t have anything to compare its interest rates and terms with. You may also bypass discounts that some lenders offer to new clients.
This is why researching and shopping around is the key to finding the best loan. Only by doing this and comparing offers can you find a proper loan for your needs. Also, thorough research will help you find online lenders offering legit cash loans.
Work with a Lender That Charges Reasonable Interest Rates
You need to be aware of a loan’s interest rate (often referred to as “APR”), as this will be the price you’ll pay to borrow money. It’s how lenders make money, after all.
In many cases, US consumers with fair to good credit scores can expect interest rates ranging from 6% to 36%. If you have a very good or exceptional credit score, then you can expect a lower rate. On the flip side, borrowers with bad credit scores can expect to pay for higher interest rates.
Rates still vary though, as some online lenders consider income to be more important. A borrower’s current ability to repay the loan is more crucial to them than their credit score. Prove that your current income is more than enough to repay the loan, and you may enjoy a lower interest rate.
Weigh the Pros and Cons of Short-Term and Long-Term Loans
The loan term is the length of time that a borrower can repay the loan. For small personal loans, it can be anywhere from one to twelve months or longer. You should choose a term based on your ability to repay (on time!) and how much the term can affect your total loan costs.
Loan terms also impact the profit lenders make from lending money. Usually, the shorter the term, the lower the profits lenders make. That’s because borrowers make fewer payments towards interest.
This is why short-term loans often carry higher interest rates than long-term loans. Still, this means you’ll pay less towards interest, so your total loan costs may be lower.
Conversely, a long term loan can have a lower interest rate since it has more interest payments. The longer the term, the more lenders can profit off the loan.
A long-term loan can still be a good choice though since your monthly repayments will be lower. These loans come with the lowest monthly payments, making it easier to pay back a bigger loan.
Choose a Loan That Has the Lowest Transaction Fees
Aside from interest rates, some lenders also charge origination fees or processing fees. Origination fees are charges for processing loan applications and disbursing funds. Processing fees are usually charged for processing monthly payments.
Origination fees alone can range from 1% to 8% of your loan amount. So, if you borrow $1,000 with an 8% origination fee, the lender will charge you $80. That’s about four days’ worth of food, considering that the average food spending in the U.S. is $7,729 per year or about $20 a day.
Not all lenders have these fees though, so your priority is to find one of these institutions. But if you don’t qualify for their loans, then at least choose one that has the lowest charges.
Follow These Tips Now to Find the Best Personal Loan
There you have it, the most important steps to take to secure the best personal loan for your needs. Don’t skip any of them, as they will all help you make your loan more affordable. The more affordable your loan is, the easier it would be to pay it back on time and in full.
Looking for more useful advice and how-to guides like this? Then be sure to head over (and bookmark) our site’s DIY and Tips section!
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