Points to Consider When You Compare Loan Rates

ElitePersonalFinance
Last Update: February 10, 2021 Loans

Most of the time, there are several loan options available. When you start looking for a loan, you might consider:

  • Payday loans that are paid off all at one time.
  • Personal loans that are paid off with installments or payments.
  • Cash Advances from a credit card.
  • Home equity loans if you own a house.
  • Car title loans.

These are just a few of the loan types available to you. Looking for the most affordable option can get complicated rather quickly, and several points should be considered before taking out any loan. By considering time limits, loan terms, and types of repayment options, you can find the best deal; or the one that fits your situation best. Sometimes important factors are overlooked because you need some extra money and you need it fast. Here are some of the most important factors to consider when deciding which loan type is right for you.

What are The Terms of The Loan?

When looking at the different types of loans, compare the loan terms each one offers. No matter what type of lending facility you are using, they will have their terms written out so you can read them. Think about these perspectives:

  • If possible, choose loans with the shortest terms available – it accumulates less interest over time.
  • If a short-term loan has a super high-interest rate, then consider taking a long-term loan instead.

What is The Annual Percentage Rate (APR) or Interest Rate?

This may be the most important consideration you make when choosing the best loan. It’s not enough to look at the basic interest rate. You will need to look at the APR or annual percentage rate. The APR includes all different types of fees that may be associated with the loan. The basic interest rate is just the amount of interest charged. It’s a flat percentage, like 15%. When you compare APRs, you get a more accurate cost of the loan in the long run. This is true for most loans, but if the loan has a variable rate, the interest changes based on the market, making it difficult to compare loans. Usually, comparing interest rates comes down to being comfortable with the interest being charged and the payment plan necessary to pay it off over time.

Does Your Credit Rating Affect The Interest Rates?

Your credit score can dictate your interest rates on certain types of loans. It’s important to check them out thoroughly before you take out a loan because they can differ.

  • Most unsecured loans like a payday loan will not have varied interest rates based on an individual’s credit score.
  • Most secured loans like you get from a bank will usually have higher interest rates for people with lower credit ratings.

What is a Balloon Payment?

Some types of loans have a shorter term, and they are not paid off in monthly installments. This type of loan has a large balloon payment due at the end of the period. When you consider this type of loan, remember that you will have to have a large lump sum due at the end of the loan term, or you may need to refinance. With payday loans, you pay the loan in full in one single payment. On occasion, you can reschedule the loan payment if you cannot pay the balance in full as scheduled.

What is The Total Amount You Owe?

The total amount you owe is going to be more than just the initial amount you borrowed. It will include the original amount you borrowed and any fees along with the interest the lending institution charges on loans of its type. The best thing to do is choose a loan where you will owe less money over the loan’s entire duration. You also want to choose a loan with a payment plan that you can afford and easily manage without breaking your budget. Most lending agencies can break the total amount of the loan down for you, so it’s easy to understand. It’s important that they show you several things:

  • Total amount borrowed.
  • All transaction fees.
  • The total amount of interest.

When you add these up, you will see the total amount you will owe for the loan.

What Type of Payment Plan Does The Loan have?

Don’t forget to look at the payment plan as different types of loans can have other payment plans and options. A payday loan is usually a smaller amount of money paid back all in one payment on your next payday; an installment loan may be a larger amount of money, but it is paid back in several payments made over a series of months. Some loans offer variable interest rates, which can give you lower monthly payments than some of the other types of loans. But don’t look at just the payment plan. You also have to look at the entire loan and not just payments. If you look at the lower monthly installment payments, you might think it’s the best deal when the truth is that you’ll end up paying more in the long run. You need to look at the entire amount owed and how it will be paid back ultimately.

Choosing The Right Loan for You

That seems like a lot to look at when you need some money to get buy. But each piece to this puzzle adds up, so it’s important to consider each one. Which is the most important factor to look at? Probably your ability to make the payment(s) on loan. It’s likely your budget is already tight, so make sure you can make the loan repayment schedule, so you don’t get into deeper trouble. Whether it is a lump sum payment or installments spread out over a long period of time, it’s imperative that they can be paid as scheduled. Not paying them back can be detrimental to your credit score.

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