4 Factors to Examine When You Compare Personal Loans

Many people compare personal loans on the basis of interest rate alone. It is true that interest rate is the primary factor determining the cost of the loan over time. However, there are a number of other factors that can make loans with slightly higher interest rates better deals in the end. Comparing a loan against all factors is important to knowing what is the best deal for the borrower. Commit to looking over at least these four criteria before making your decision on which loan to sign. 

Structure of Financing

There are two major ways that financing is structured: through installment line or through revolving line. An installment line of credit is distributed in one lump sum, the principal, which is then paid off over several months or years of set installment payments. These loans are also called closed-end loans because the monthly payment amount and number of payments is set from the beginning. Revolving credit lines are more flexible, though not necessarily better. These allow you to determine how much to spend and how much to pay back each month. Interest rates may adjust on revolving lines, making them more expensive if you are not careful.

Interest Rate

Interest rates are the main factor determining how expensive your loan will be over time. The actual annual percentage rate (APR) is just a portion of what to consider with your interest rate. You also need to evaluate the loan in terms of whether it is fixed or adjustable. Fixed rate loans are often preferred because they are predictable over time. However, adjustable rates can be a great option for people who need a loan to be less expensive in the beginning. When using an adjustable rate, make sure there are caps on how high the rates can adjust. For example, you can elect to stop the rate from adjusting more than a certain percentage over the initial rate or over the national prime interest rate. 

Terms for Modification

Loan terms are often overlooked when borrowers are comparing personal loans. Loan terms dictate what a borrower must do if he or she aim to modify the loan in the future. Examples of modification include refinancing, consolidating or settling the debt. It is easy to think that you will not have to seek loan modification for any reason. Circumstances are often unpredictable, though, and loan modification may be unexpectedly necessary. Knowing the fees and penalties that will be assessed against you in these cases, or even if you are late on a payment, is an important part in evaluating the total cost of the loan.  

Terms of Default

Default can mean different things on different loans. For example, some loans state the lender has to notify the borrower of default a certain amount of times before seizing collateral or taking the loan to collections. Other loans allow a lender to seize collateral even without notification. Unsecured loans have no collateral, meaning the lender may have built-in other terms of default. Knowing what a default means on your loan will help you choose the best loan and also protect you from unforeseen negative circumstances. 

 


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