What You Need to Know Before Taking Out a Personal Loan

Personal loans are a great resource for a wide variety of financing needs. Many people use an unsecured personal loan to start a new business rather than seeking a small business loan, due to advantages in obtainability and lack of required collateral. Whether you’re looking for the financing to get your own business off the ground or just planning to finally consolidate and pay off debt, it’s wise to consider a personal loan first. But, like any financial decision, it pays to educate yourself before jumping in.

Shop Around

Don’t just sign papers with the first loan company you come across. Especially in the age of online loans, it’s a borrower’s market. Decide whether you’re willing to put up collateral (secured) for your loan or not (unsecured). Figure out what’s important to you in a loan. A high limit? A low-interest rate? A low APR? A short (or long) repayment period? See what’s available through your financial institution, and then compare online lenders. You may be shocked at the difference in offers you receive based on your same credit score.

Interest

Taking out a loan means paying interest on the money you borrow. But don’t just leave it at that. Learn the interest details before you agree to a loan. Find out whether the interest would be fixed or variable, and compare the rate with the rates of other lenders. Most personal loans use fixed interest rates, but the difference is worth being aware of.

Fixed

A fixed interest rate is exactly what it sounds like: your interest rate will remain the same through the entirety of your loan. This is great for stability, but if the market changes, you may be stuck paying a higher-than-average rate. On the other hand, if interest rates jump, you’ll be locked in at the lower rate.

Variable

A variable interest rate is susceptible to rising or falling based on interest rates in the market. You may agree to your loan at a low introductory rate and then watch it jump a few months later, or you could get lucky, and rates could stay low. It’s a bit of a risk that sometimes does pay off in comparison to a fixed rate.

APR

APR is one of those terms everybody has heard of, but most people can’t define. What actually is APR? APR stands for Annual Percentage Rate, and it’s extremely important when comparing loans. Basically, your APR is your interest rate plus additional financial fees from your bank/lender. So if you’re comparing two loans, the one with the highest interest rate may still end up being cheaper overall if it also carries the lower APR. It’s important to remember that things such as your credit score can have an effect on your APR. Without any collateral, lenders can only base your ability to pay back your loan off of your creditworthiness. So, a poor credit score could raise your APR up as high as 36 percent.

This is not a Long-Term Solution

While a mortgage can be paid off over decades, a personal loan usually needs to be paid back within seven years or less. However, this can be beneficial, in the sense that it keeps you from borrowing money for more time than you need. If you’re looking to borrow a large sum of money for something like a home remodel, then it’s important to consider how large your monthly payments will be, given the short payback time. How large of a monthly payment can you really afford? Remember, a personal loan is not a long-term solution to your financial problems and should be used responsibly.

Don’t be afraid of applying for a personal loan. Learn as much as you can, compare as many offers as possible, and then pull the trigger. Taking out and repaying a loan will only help build your credit score, in addition to helping you fund whichever project you seek financing for. Be smart, seek professional guidance when necessary and use a little caution, and you’ll have a win-win.

Published by Kidal Delonix (1198 Posts)

Kidal Delonix is a contributor to Mr. Hoffman's blog. The views and opinions are entirely his/her own and may not reflect Mr Hoffman's views.