Shopping for a Personal Loan Online: 5 Factors to Consider
If you’re like most people, you already have enough on your plate. And the not-so-fun activities – like dealing with your personal finances – often take a backseat to everything else that is soaking up your time. You know that you could free up a lot of time and your budget, if you simply get a personal loan. However, shopping for a personal loan online and comparing all the choices can quickly become a time-consuming chore.
But don’t fret. While personal loans may seem complicated, the differences between them boil down to just five basic elements. Here are the five things you should consider carefully before deciding on a personal loan from an online lender.
1. How long do you have to repay the personal loan?
The “standard” personal loan is typically repaid over the course of three years. Nevertheless, lenders will make personal loans that can be repaid in one to five years. A longer loan repayment period allows you more time to repay the loan (and result in a lower monthly payment). But it may also come with a higher interest rate.
How much time you need to repay a loan is the first thing to figure out while you shop for a loan. Ideally, you would a balance between the interest rate you pay and the flexibility you receive with a longer loan term.
If you are on a tight budget, consider picking a three-year loan for more flexibility with payments. The extra time and lower monthly payments will give you some breathing room with your budget. Besides, if you feel flush with cash at a later time, you have the option of making a larger loan payment to pay off your loan faster than planned.
The most important thing is being certain that you will be able to afford the monthly payments on your loan without a hiccup. Sure you might score a 7% rate on a two-year loan vs. an 8% rate on a three-year loan. However, interest you save from a shorter-term loan can be erased by a single late payment fee if you can’t make payments in time or in full. It’s much better to pay a loan longer than to pay a loan late.
Consider this: A $10,000 loan might carry a monthly payment of $473 per month for two years, or $315 per month for three years. Adding an extra year to loan repayment period can greatly reduce your monthly payment. AKA making your life much less stressful.
2. What will you pay in interest on your loan?
When shopping for a personal loan online, it’s important to compare interest rates between different lenders and loan types. Here's where having a good to great credit score has its benefits. A good score can offer you a more attractive rate and make the application process much easier.
The interest rate is usually the single biggest difference between lenders. When shopping around, compare online personal loans by the annual percentage rate or APR. This rate reflects the total cost of getting a loan (including fees) as a percentage of the amount you borrow. The annual percentage yield, or APY doesn’t take fees or differences in how the interest rate is calculated into consideration. So basically comparing loans on APY is like comparing apples to oranges.
You can also compare personal loan APRs to alternative ways to borrow. The average credit card APR can be as high as 20% or more per year, even for people who have good or excellent credit. A personal loan might have an APR as low as 7% per year, making it a much better alternative to putting a large purchase or expense on a credit card. Sure the APR savings alone is a very big deal. But personal loans are often repaid much faster than credit card balances when you make the minimum monthly payment. Based on this, a personal loan might actually get you on the path to being debt free faster than credit cards!
3. How much can you borrow?
Not all online personal lenders can meet their applicants’ borrowing needs. While many lenders offer loans sized up to $35,000, some limit borrowers to $5,000 or less. Most online personal loan lenders prominently display just how much you can borrow on their website. If you need to borrow $20,000 to consolidate credit card debt, it doesn’t make sense to file an application with a lender who will only make loans in amounts of $5,000 or less.
Lenders pull your credit report and look at your credit score as one method of determining whether or not to give you a loan. By applying only at lenders that can match your borrowing needs, you’ll be able to reduce the number of inquiries on your credit report. Besides, having just one loan is much more convenient than having several smaller personal loans with different due dates to juggle from month to month. If a lender can’t meet how much you need to borrow, there are likely many others who can.
4. Are there any fees?
The interest rate is just one cost associated with a loan. Loans can carry other costs, including origination fees, prepayment penalties, and other hidden expenses. These costs can add up, as origination fees are often set to 1% to 5% of the loan amount, while prepayment fees can be charged on a flat-rate basis ($100, for example) or as a percentage of the loan amount for paying off the loan early.
Origination fees can be especially troublesome because they are usually subtracted from the amount you borrow. If you take out a $10,000 loan with a 2% origination fee, you may simply receive $9,800 in loan proceeds, but have to pay back $10,000 plus interest. This can be a pain point for people who need the exact loan amount, since a $10,000 loan might only give you $9,800 in cash to use after a 2% origination fee.
All this is to say that a one-year loan that carries an interest rate of 12% with no origination fees may be better than a one-year loan that carries a 2% origination fee and an 11% interest rate. Again, it’s important to look at the loan’s annual percentage rate (APR), a figure which includes fees and interest, when comparing one online personal loan to another, since the APR bakes in the typical fees like origination charges.
5. How are payments made?
There are two common methods for repaying an online personal loan. Some lenders require you to provide your checking account information so that payments can be automatically drafted from your bank account each month. Others may send you a monthly statement (electronically or by mail), requiring you to go through the effort to make each payment.
One method isn’t necessarily better than another, though sometimes lenders who automatically draft payments from your account might offer a lower interest rate than those who do not. The key thing here is to know how payments are supposed to be made, when they’re due, and how it fits into your personal cash flow.
So if you get paid twice per month on the 1st and 15th of every month, consider having your payments drafted on the 17th. This allows enough time to ensure your check clears from your employer before the payment is deducted.
So now what?
It’s true – loans can be complicated, especially for people who aren’t used to shopping around and comparing them to one another. But if you focus on these five things, you’ll be sure to find the loan that best fits your needs at a rate and monthly payment that can fit within your monthly budget.