Is Your Personal Loan Estimate Guiding You Right?
A personal loan is a smart way to fund purchases or quickly find a solution for unplanned events. Whether you need to pay off debt, make a down payment, or just need a little extra cash for a vacation, a personal loan will make it easy.
What is not so easy is picking the right loan provider. There is a wealth of factors to consider that you might not even be aware of, but fortunately, there are plenty of useful tools at your disposal that can make the process of comparing lenders simple and fast.
One such tool is a loan estimate. In this article, we’re going to take a closer look at what a personal loan estimate is and how it can help you make the right financial choices.
How Personal Loan Estimate Can Empower You
Personal loan estimates get you all the important information you need to know about what a loan provider is offering you before having to take the plunge. This helps protect borrowers from falling into false promises and hidden fees, as well as helping to better compare different loan providers.
In short, loan estimates make it easy to choose the provider that best fits your financial situation.
Loan estimates were put into place in October of 2017 by the Consumer Financial Protection Bureau (CFPB) and provide prospective borrowers with the following information:
The loan amount
The interest rate
The monthly principal plus interest rate payments
Total monthly costs
It's important to make sure that personal loan estimates are accurate because this is your best tool for comparing providers. If a loan estimate seems too good to be true or leaves out important information, then there's a good chance that the provider is attempting to make the deal seem better than it is.
Another way to see if a loan estimate is accurate is by speaking directly with someone from the lending institution. Talk to them and make sure that the information given matches what your loan estimate states.
How To Compare Personal Loan Estimates
Aside from helping you quickly decide if a lender's rates will work for you, personal loan estimates make it much easier to compare the prices of different providers. It bundles all the information in one place so you can quickly compare the numbers.
Since your loan amount and payment period are going to be similar across providers, the main factors you'll be looking at when deciding between lenders is the interest rate and monthly installments. Always make sure that you can reasonably afford a monthly payment, or you could end up hurting your credit standing. Your interest rate is determined primarily by your credit score, so having a good credit score before applying is always best.
Where Does Annual Percentage Rate (APR) Fit In?
Another crucial piece of information in a loan estimate is your annual percentage rate, or APR.
While most of the information in a loan estimate is pretty self-explanatory, you may be confused as to what an Annual Percentage Rate is, especially if you're applying for a loan for the first time.
Annual Percentage Rate, or APR, is your interest rate combined with all associated annual fees represented as a percentage. In other words, if a provider gives you an APR with your loan estimate, you can add it to your monthly principal and have a very close estimate of what your monthly payments will end up looking like.
Breaking it down
There are two kinds of APRs.
The first is a fixed APR, which won't change over the course of your loan term. The second is an adjustable APR, which is subject to change over time.
Providers that offer you an adjustable APR will give you the minimum and maximum that it will be able to go. So even if it does change, you have an idea of what that change will look like. If you're deciding on whether or not you can afford a loan with an adjustable APR, always assume the worst case scenario so that you don't end up with a loan that you can't afford later on.
The higher your APR is, the more you will end up paying in the long run. Your APR will typically be lower if you have a high credit score, but other factors are taken into consideration as well, like your debt-to-income ratio.
Personal loan estimates are a fast and reliable way to compare different loan providers against each other, and they can even be a helpful tool for determining a lender's credibility. If you notice contradictions in what the lender tells you and what their loan estimate says, give them a call and make sure you clarify that.
All in all, personal loans are a great way to quickly tackle a financial goal, boost your credit score, and set yourself up for financial success. Start taking advantage of the tools available today to ensure you choose the provider that's right for you!
Please consult with your attorney, financial consultant/planner, accountant, and/or tax advisor for advice concerning your particular circumstances. The information contained herein is for general informational and educational purposes only and should not be construed as professional, tax, financial or legal advice or a legal opinion on specific facts or circumstances. The information or opinions contained herein should not be construed by any consumer and/or prospective client as an offer to sell or the solicitation of an offer to buy any particular product or service.