Urgently in need of money, but clueless on where to start?
Personal loans are one of the fastest-growing financial products in recent years, with 24.8 million Americans currently taking personal loans. So it’s not a wonder why many of you might be in such a situation of an instant need of cash.
The problem is:
Choosing a wrong loan could cost you thousands of dollars in extra interest and fees, but choosing a right one? Let you get the cash you need in a reasonable rate.
In this handy guide, you’ll find exactly how to choose a personal loan that’s right for your situation.
What you’ll discover:
- Why Personal Loans Are Growing So Fast
- Different Loan Types Explained
- How To Get The Best Interest Rates
- How To Compare Lenders Smartly
Why Personal Loans Are Growing So Fast
Personal loans aren’t just popular. They’re exploding.
Recent industry data shows that over the past 5 years, personal loan debt increased 64% to over $143 billion as of September 2023. Compare this to credit card debt, which only grew 33% over the same period.
So what’s behind the massive growth?
Simple. People are taking out personal loans instead of credit cards because they offer something credit cards don’t… Fixed rates and predictable monthly payments. When you’re trying to consolidate debt, save for a wedding, or cover unexpected expenses, that predictability matters.
But here’s the best part…
Accessing quick personal loans is easier than ever. If you need fast financing solutions, services like One Hour Loan services can help you secure funding quickly without the traditional banking hassles. This instant access to cash has made personal loans the go-to financing option for thousands of borrowers who need money today.
Understanding Different Loan Types
Personal loans come in a variety of flavors, so let’s first get a better understanding what you are getting into.
There are two main types of personal loans:
Secured vs Unsecured Loans
Unsecured loans: These are the most common type of personal loans. As their name suggests, unsecured loans don’t require you to put up any collateral in order to get approved. You’re simply borrowing against your creditworthiness.
Secured loans: On the other hand, secured loans require you to put up an asset (usually your car or a savings account) as collateral. The upside is you’ll get lower interest rates. The downside is you risk losing your asset if you can’t make the payments.
For most people, the only option is an unsecured loan. They’re faster and you don’t risk losing property.
Fixed vs Variable Rates
Personal loans also come with either fixed or variable rates. As you might have guessed, fixed-rate loans have payments that stay the same over the life of the loan. With variable rate loans, your payment can change based on market conditions.
My advice? Opt for fixed rates every time. There’s no reason to gamble with variable rates when you can have predictable, fixed payments instead.
How To Find The Best Interest Rates
If you really want to save thousands on a personal loan, it all comes down to your interest rate.
The average interest rate on a personal loan is currently around 11.57%, but this can vary from as low as 6% up to 36% depending on your situation. Here’s what will affect your rate:
- Your credit score (the higher, the better)
- Your income and employment history
- The loan amount and term length
- The type of lender you apply to
Your credit score is your financial report card that lenders look at to determine if you’re a good risk. The better your credit score, the better the interest rate you’ll be offered. If you have excellent credit (720+), expect to qualify for the best rates around. But don’t fret if your credit score isn’t perfect. There are still great options available to you.
Shop Around Like Your Money Depends On It
Because it does.
Never settle for the first loan offer you get. Rates can vary widely from lender to lender, even for the same borrower. Banks, credit unions, and online lenders all compete for your business.
Fortunately, most lenders offer a soft credit check during the pre-qualification process. This won’t hurt your credit score and allows you to see what rate you’d be approved for. Take advantage of this and shop around to compare multiple offers.
Smart Ways To Compare Lenders
When it comes to comparing lenders, there’s more to it than just the interest rate.
You need to consider the total cost of the loan, which means looking at:
- APR (Annual Percentage Rate): This is the interest rate plus any fees
- Origination fees: Some lenders charge 0-8% of the loan amount just to process your loan
- Prepayment penalties: Can you pay off the loan early without penalty?
- Loan terms: Shorter loan terms mean higher payments but less total interest
Recent data by industry experts found that 50.4% of borrowers are now choosing fintech lenders over traditional banks when it comes to personal loans. Why? They offer faster approvals and more flexible requirements than ever.
But that doesn’t mean you should write off traditional lenders…
Credit unions often offer the lowest rates if you can qualify for a membership. Banks provide stability and in-person service. Online lenders provide speed and convenience. The best lender depends on what’s most important to you.
Read The Fine Print
Yes, it’s boring. But do it anyways.
Hidden fees can turn a seemingly great loan into an expensive nightmare. Be on the lookout for late payment fees, insufficient funds charges, admin fees, and rate adjustment clauses.
Got questions? Ask. A legitimate lender will be more than willing to explain everything to you in detail.
Watch Out For These Red Flags
Sometimes the term “lender” is just a front for predators in disguise. Legitimate lenders don’t charge fees before they approve your loan. Nobody can guarantee loan approval (if someone says they can, run). If you feel rushed to sign on the dotted line, that’s a red flag. A good lender will give you the time you need to review the documents.
The moral of the story? If it sounds too good to be true, it probably is.
Making Your Final Decision
You’ve done your homework and compared several lenders.
It’s time to take the plunge and pull the trigger. But before you do, ask yourself a few questions first:
- Can I afford the monthly payment?
- Do I fully understand all the fees?
- Is this really the best rate I can get?
The answer should always be a no. Don’t borrow more than you need. Just because you qualify for a $50,000 loan doesn’t mean you should take it. Borrow only what you need and the less you borrow, the less you pay in interest.
Also consider setting up automatic payments. Many lenders offer a rate discount (usually 0.25%) if you do. You also won’t ever miss a payment.
Final Thoughts
Choosing the right personal loan doesn’t have to be a daunting task.
Start by understanding the types of loans available and what rates you qualify for. Then shop around and compare at least 3-5 lenders. And don’t just look at the interest rate, examine the total cost instead.
Avoid these common mistakes:
- Accepting the first offer you receive
- Ignoring hidden fees and fine print
- Borrowing more than you need
- Skipping the pre-qualification process
Personal loan market is more competitive than ever, which means you as a borrower have more power than ever. Take your time, do your research, and find the right financing solution for you.
