What You Should Know About a Personal Loan
Life happens. You need cash. It could be to pay for home improvements, a wedding, medical bills, or even that once-in-a-lifetime trip. Personal loans are one way to get the money you need. But not the only way. If you have a really excellent credit score, you could qualify for a credit card that offers zero interest for a year, or even longer. However, if you decide that a personal loan is the best option, there are some things to consider.
Fixed or Variable Rate
Most personal loans will come with a fixed rate. The advantage is that you know exactly what your monthly payment is, and can budget accordingly. Some personal loans are available with a variable rate. The advantage to a variable rate loan is that you can pay it off early if you want without incurring an early termination fee that a fixed-rate loan would charge.
Secured or Unsecured
Unsecured loans aren’t backed by assets. The lender can’t seize your collateral if you default on the loan. For this reason, unsecured loans generally come with a higher interest rate.
A secured loan is backed by an asset. If you can’t pay the loan, the lender has the right to take possession of your collateral as payment. These loans usually charger a lower interest rate, but you want to be certain that you can pay the loan due to the potential risk of losing whatever you put up as collateral.
Your bank isn’t the only place in town offering personal loans. Credit unions are non-profit, so often they can offer a lower interest rate. Peer-to-peer lending sites like Prosper and Lending Club are other options to explore.
While considering your options, be sure to check for any additional costs associated with your loan on top of interest. You want to check out the TAR (total amount repayable) that would take into account things like origination fees or prepayment penalties.
Before starting the loan process, be sure to check your credit score to get an idea of what kind of rate you qualify for. Be sure to shop for the best overall deal, not just the best interest rate. And remember, shopping for the best loan option is not the same as applying. Each actual loan application results in a hard inquiry, which can lower your credit score by a few points.