Getting the Best Deal on Your Personal Loan

Personal loans aren't all created equal, and you need to shop around before you settle on a lender who bests meets your needs. Most banks and credit unions have fairly similar requirements and policies regarding loans, but you do need to know how to compare loans in order to discover which one will cost you less over time. For most people, those comparisons start with interest rates.

Chances are you've seen banks, credit card companies, and even car lots advertising low interest rates. What you may not have read on those commercials and advertisements is the small print explaining that those rates aren't for everybody. In many cases, they are for practically nobody. Those advertised number are known as headline interest rates, and they are mainly used to draw in consumers. The truth is that interest rates are based on your credit score: the higher your score, the lower your rate. No lender can quote you an interest rate until they've reviewed your credit report.

Even after they do quote you a rate, however, you need to realize that the monthly interest rate will not give you an accurate idea of how much you will have to pay. The interest rate is only one item that can affect the total costs of the loan. Origination, processing, underwriting, even credit report fees can also cause you to pay significantly more over the life of your loan, but your lender may not explicitly point out that fact to you.

Because many factors contribute to the total cost of your loan, it can be difficult to fairly make a comparison. For that reason, the Federal Truth in Lending Act requires all lenders to figure all of those factors, including those you pay out-of-pocket and upfront, and your interest rate into one sum known as the Annual Percentage Rate or APR.

The APR, which tells you the interest rate you'll be paying yearly, is the best way for you to compare loans. It provides you with an accurate picture of what the loan will cost. When you start comparing, you may be surprised at how much APRs differ even when the interest rates for two loans are the same.

Another factor that will contribute to the over all cost of the loan is the length of its repayment period. While your monthly payments for a five year personal loan may be cheaper than for a three year one, you will still end up paying more in the end even if the interest rate is lower.

You should also ask your lenders about other fees which may affect the total amount of your loan. These fees could include charges for late payments or early repayment penalties. Banks are notorious for charging high fees on everything, and late payments are often not an exception. Make sure that you know exactly when your payments are due and when late fees will begin to accrue so you can plan accordingly. Early repayment penalties are often charged by banks when you pay off a loan early which means that you are reducing the amount of interest the bank earns off your debt. Some institutions do not charge anything extra if you want to pay it off early, however, some will tack on outrageous fees to cover their loss. Be sure you ask about the bank's policies about early repayment.

The bottom line is that looking just at interest rates or monthly payment amounts will not allow you to correctly compare personal loans. You need to consider each loan's APR and repayment period to get a clear idea of how much the loan will cost you in full. Also, check to make sure there are no additional possible fees that might come up as you pay back the loan so you'll have a complete picture of what to expect financially. While all of this work may seem overwhelming now, it could save you from paying than you have to for your loan and saving money in today's economy is definitely worth the effort.

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