Top 07 Factors to Consider Before Picking a Personal Loan

These days, personal loans have become increasingly common worldwide as a preferred choice of credit for borrowers. Without a doubt, the right personal loan is solid financial support, whether for home improvement, vacation, health care, or debt consolidation. But how to choose the right personal loan? There are various factors for you to consider, from interest rates to repayment terms, fees, and beyond. In this post, we’ll explore the significant factors to take into consideration before picking a personal loan to help you make informed, smart financial decisions. Read along to find out now.

What Is A Personal Loan?

A personal loan, unlike specific-purpose loans, is a type of unsecured loan that allows people to borrow a certain amount of money from the bank or a financial institution for various purposes without needing to provide collateral. These purposes can be funding home improvements, consolidating debts, funding unexpected expenses, etc.

Personal loans often have fixed interest rates along with a predetermined repayment period. It’s worth noting that the interest rates, fees, and terms of a personal loan are primarily based on the borrower's credit score, income level, employment, and more, making it vital to compare offers before officially choosing a loan.

Top 7 Key Factors To Take Into Account When Choosing A Personal Loan

Before picking a specific personal loan, we highly recommend you conduct detailed research and thoroughly study the different lenders and their loan terms. This way, it’s easier to decide what's the most suitable option for you.

There are always a bunch of different factors to consider while seeking the right personal loan. The following are 07 of the top factors that you should take into account:

Your Credit Score

It’s essential to check your credit score or rating before taking further steps toward getting a personal loan. The credit score, or credit rating, is a substantial indicator of a person’s eligibility for any personal loans. A higher score means higher chances of getting the loan approved, and vice versa. In addition, your credit score also enormously impacts the loan amount, interest rates, and more.

The Loan Amount

Ask yourself how much you want to borrow for the loan and what you intend to use it for. Depending on your need for funds, you can determine the loan amount you’d like to borrow; based on that loan amount and the loan repayment tenure, you can calculate the EMI (Equated Monthly Installment) obligations.

The Loan Tenure

When taking out a loan, we strongly advise you to fully assess your repayment capacity and opt for a loan duration that best suits you. It’s extremely important to remember that failing to repay a loan on time could negatively impact your credit score, which may make lenders less likely to approve your future loan applications. That’s why you, as a borrower, should always avoid defaulting on repayment. Please note that lenders offering a shorter repayment period would naturally require higher EMIs due to the fewer installments, and vice versa.

Lenders

You may find there are tons of personal loan offers with surprisingly attractive rates and terms available out there. But don’t rush; you don’t know whether these offers are really attractive until you do your due diligence, which can keep you from loan traps or falling for fraudsters.

To make a well-informed decision, consider using an online aggregator platform to compare different lenders, their interest rates, and associated terms. This platform also helps you stay updated on special deals from various lenders.

Don’t forget to gather insights and reviews from existing customers to gain more valuable information about customer service, reliability, reputation, and overall experiences. You can get these insights via online reviews and feedback forums.

Interest rates

Interest rates determine the total cost of your loan. Generally, as collateral is not required, interest rates for personal loans are much higher than those for secured loans. It's vital to assess and compare the interest rates provided by various lenders before you decide to take any personal loan.

Don’t merely look at interest rates (or APRs-Annual Percentage Rates) but also other loan terms. There's no shortage of loan offers at impressively low interest rates, but be cautious—you may find yourself paying extra because of various other unreasonable loan terms when opting for such seemingly great loan offers.

Besides, make sure to learn how the lenders calculate interest rates for their offers. In many cases, loan interest rates determined through a reducing balance method are regarded as ideal for borrowers.

EMI Calculations

It matters to get yourself accustomed to the EMI calculation process before taking out a loan. Knowing this allows you to determine the monthly installment amount you’ll need to pay and be clear about your capacity to repay your loan on time.

Fees Associated with the Loan

Each loan will come with its own set of fees, including Origination fees, Servicing fees, Withdrawal fees, Insurance, Early exit, and more. The origination fees, for example, are applied to account for the expenses related to processing and managing the personal loan application. The fee typically varies from 0.5% to 1% of the entire loan amount. Nevertheless, some lenders may impose a fixed fee.

There might be other additional changes, such as late payment charges, prepayment penalties, or more. So, ensure you carefully factor in all the fees associated with the loan when opting for a personal loan and avoid unexpected and unnecessary expenses.

Bottom line

In conclusion, choosing a personal loan requires careful consideration of various key factors, from your credit score to interest rates, repayment terms, fees, the lender’s reputation, and more. These factors can enormously affect your eligibility, interest cost, and repayment options. It’s advisable to study different loan products and lenders as well as compare them to get the most suitable deal for your individual needs and financial situation. Use the loan calculator to determine your affordability and plan your budget. Remember, a personal loan may help you achieve your goals, but only if you opt for the right one. Also, you should only apply for a personal loan when you truly need it.