When you’re considering taking out online loans, it’s important to shop around and compare your options.
However, many people put interest first and foremost while ignoring several other critical factors.
Interest is important, of course, but loans have many moving parts. These are five key factors you should use to pick the right loan for you.
1. Interest Rate and APR
Your loan’s interest rate is a big part of how much the loan will cost you, so a low interest rate or Annual Percentage Rate (APR) is a priority for most borrowers.
Not sure whether to look at the interest rate or APR when making a decision? The APR is simply a combination of the total interest and fees involved in taking the loan over the course of a year, expressed as a percentage.
That means comparing the APR has the advantage of including the total cost, while the interest rate is only part of the cost to you. However, an APR may be less meaningful than the simple interest rate for loans with a repayment term of less than a year.
2. Fixed vs. Variable Rate
The type of interest rate is also important. There are two kinds.
- Fixed rate: Fixed-rate loans maintain the same interest rate for the life of the loan.
- Variable rate: Variable rate loans can change their interest rates. Most follow the Prime Rate, a rate set by the Federal Reserve. Additionally, some lenders change their variable rates more often than others.
Variable rate loans are tempting. They often start cheaper than fixed rates, and historically variable rates have performed well compared to fixed rates. However, there is the risk of your interest rate rising, and it may be harder to budget for variable rates due to their unfixed nature.
3. Repayment Schedule
Loans can be designed to be repaid in a single month or over the course of years, and picking a repayment schedule that makes sense for your needs is vital to successfully paying off a loan.
Some loans may take much less time to pay off but have a higher monthly payment. Others might be longer-term with a lower monthly payment.
When choosing a loan, you have to consider your cash flows. If a lower-interest, shorter-term loan with high monthly payments is not affordable for you, then taking a loan with a higher rate but spread out much longer for a lower monthly payment can work better.
4. Credit Requirements
Most types of loans let you enter some preliminary information and prequalify without a score-damaging hard inquiry.
Now, prequalifications aren’t guarantees that you’ll get specific loan terms or that you’ll receive a loan at all. However, they indicate you have a strong chance of scoring similar rates and terms when you formally apply.
Gathering prequalifications is a great tool if you have poor-to-fair credit, as hard inquiries can further ding your credit score.
Even if you can’t find many offers due to a bad credit history, there are no-credit-check loans out there. They may ask you to verify a source of income such as pay stubs instead.
5. Prepayment Penalties
What if you happen to get a windfall such as a Christmas bonus or unexpected raise, and you want to pay off your loan early?
Be careful. Some lenders slide prepayment penalties into your loan’s fine print. If you pay off your loan early, they charge you extra for it.
It seems odd, but consider this: banks make money off your interest payments. When you pay off your loan early, they lose out on future interest earnings. Thus, they put a prepayment penalty on it to both dissuade you from early payments and mitigate their losses if you do so anyway.
Luckily, many lenders now don’t have prepayment penalties, but be sure to read the fine print if repaying your loan ASAP is important to you.
Notice: Information provided in this article is for informational purposes only. Consult your financial advisor about your financial circumstances.
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Original Source: 5 Things to Look for When Comparing Online Loans