Personal loans are an avenue to explore if you are looking to get your hands on money to meet various needs.
Considering that these loans are extended for a defined term, consumers also like the enforced discipline of paying off the loan within a set time frame.
Here are 10 tips for 2016 for those considering personal loans.
Compare the best personal loan rates at Bankrate.com.
1. Make sure a personal loan offers you the best deal
Consumers use personal loans for different purposes.
For instance, you could use them to consolidate your credit card debt, for home improvement purposes, to invest in your business or simply to take a vacation.
Check if there are other types of loans that could serve your needs better. For instance, you could take out a home equity loan or line of credit.
Considering that home equity loans are secured by your home, whereas personal loans are not secured loans, your interest rate is likely to be more favorable when you tap into home equity.
2. Choose the right lender
Financing sources that offer personal loans include banks, credit unions and online lenders.
Each of these offers a range of interest rates, and their terms vary. That’s why you should shop around and find a lender whose loan best fits your needs.
For instance, Perc Pineda, senior economist with the Credit Union National Association, points out that for a $5,000, 2-year personal loan, the average rate is 9.54% at credit unions compared with 9.93% at banks.
3. Be careful with credit card consolidation
Taking out a personal loan to pay off credit card debt on more than 1 card and consolidating the payments is one of the most popular uses of personal loans.
If this is your motivation for taking out a personal loan, be careful not to defeat the purpose by racking up fresh credit card debt once you pay off the old cards and have access to fresh credit.
4. Read the fine print
Be sure to ask for a full disclosure of all the loan terms and read the fine print. There are differences in the terms offered by different lenders.
See if the monthly payment and repayment terms work for you. There also could be fees for late payments.
The lender is looking to generate a steady stream of interest payments from you over the term of the loan, so there could also be a prepayment fee, or penalty for paying off your loan early.
Looking for a personal loan? Check out Bankrate.com for the best deals.
5. Make sure your credit score is accurate
Your credit score could make for a significant difference in the interest rate you’re offered on your personal loan, irrespective of the overall direction of interest rates.
For instance, you could pay as much as 20% or higher with bad credit, while you could snag a much better 8% rate with good credit.
That’s why you should make sure that your credit score is accurate and continue to be responsible in your use of credit. Also, some personal loan lenders will report only the payments you miss to credit bureaus, so you could ask your lender to report your on-time payments to bolster your credit profile.
6. Watch out for origination fees
While some lenders seem to offer lower interest rates, you might find that they also tack on an origination fee that effectively hikes your interest rate. Thus, you could be better off with a lender that offers a higher rate than others but doesn’t add on any origination fees.
7. Don’t take on more than you can afford
Before you apply for a personal loan, gauge your financial situation and how much you can comfortably take on.
Some lenders will look to ply you with more than you can handle. That means you might end up biting off more than you can chew and fall into a debt trap.
8. Be careful about allowing automatic withdrawals
Some online lenders offer borrowers incentives to provide access to their bank accounts for automatic withdrawals of their monthly payments.
In fact, they could set up the personal loan terms as such, and you would have to opt out of the arrangement. For instance, you might find that you will have to pay a fee if you prefer to pay by check. If you provide access to your bank account, though, you might find yourself out of money when you need it.
9. What if you encounter difficulties with repayments?
Find out what your options are in case you run into difficulties making your payments. Is there any potential to modify the terms of the loan?
Also, is the lender open only to arbitration if any differences arise? Or can you go through the court system?
10. Fixed rate or variable rate?
Should you opt for a variable or fixed rate on your personal loan?
Typically, you will start off with a lower rate on a variable-rate loan, but you also will be taking on interest rate risk.
As interest rates rise, your variable rate also will rise, so your monthly payments will be higher.
With a fixed rate, your payments will remain the same for the term of the loan regardless of interest rate movements.