Before you start shopping for a personal loan, be aware that rates vary. The same person could apply for a personal loan from two different lenders and get two vastly different quotes. Not only that, but lenders continually adjust their rates and terms. A lender that has the lowest APR today might not have the lowest APR a month from now.
All in all, it pays to shop around. But many people fear their credit score will be hurt by multiple hard credit checks if they do so. This is not the case, as credit bureaus recognize rate shopping as normal behavior. As long as you do your comparisons within a short period of time, your score should only take one hit.
When you do shop around, here are three things to look for:
1. Low-interest rate
The amount of interest you pay for a loan makes all the difference. Let’s say you find a great contractor who will turn your ordinary kitchen into a chef-worthy haven for $28,000. The first lender you check offers an interest rate of 7.25% for five years. Your monthly payment would be $561, and you’ll pay $5,660 in interest over the course of the loan.
Another lender offers an interest rate of 6% for five years. Your monthly payment would now be $541, and you’ll pay a total of $4,460 interest. Although the monthly payments are only $20 apart, the lower interest rate saves you $1,200 in interest payments, money you can keep in your savings account.
2. Reasonable loan terms
There’s a “sweet spot” when it comes to personal loans. You’re looking for the best interest rate, but also for a reasonable amount of time to repay the loan. When you extend your repayment timeline, you’ll get a lower monthly payment but you’ll pay more overall.
Using the same scenario as above, if you chose to repay the $28,000 loan in three years as opposed to five, your monthly payment at 6% interest would be $851 per month rather than $541. That’s a difference of $310 a month. But taking out a shorter-term loan will save on interest — in this case, you’d pay $1,824 less overall.
You need to be honest with yourself about how much you can afford to pay each month without missing payments. Your sweet spot is an affordable monthly payment combined with the shortest possible repayment period.
3. Low fees
Lenders often charge an origination fee that covers the cost of processing and distributing your loan. The fee can range from 1% to 8% of the amount you borrow. Again, using the scenario above, you could pay between $280 and $2,240 in origination fees on a $28,000 loan. Typically, the origination fee is deducted from the loan amount, meaning that you’ll need to borrow more if you need the full $28,000 to pay the contractor.
In a nutshell: You’re looking for a loan with a low interest rate, repayment terms that hit your budgetary sweet spot, and low fees. You should also take lender’s requirements into account, such as minimum credit score, so you apply for loans you can qualify for.