You always hear that in order to get a good deal on a personal loan, you have to search around and request loan quotes from many lenders before deciding which offer is best for you. However, what should you look at when comparing loan quotes? Is the APR the only variable to consider? Within this article you will find the answers to these questions.
Personal Loans
Everyone knows personal loans issued by banks and traditional financial institutions. Even though the financial industry has evolved over the years and everyday there are more and more financial products, banks and traditional financial institutions offer only a limited range of options on personal loans.
Collateral
There are secured and unsecured personal loans. The security (or collateral) is also an important factor to be taken into account when shopping for a lender. If you can provide collateral you may get a much better interest rate than with an unsecured loan. Nevertheless, you should also compare APR as if the difference is not that significant it is not worth the risk of loosing your property.
Interest Rate Type
The interest rate charged for the loans can be fixed or variable. If fixed, it will remain the same over the whole life of the loan. And the monthly payments won’t vary over the months if there are market variations. Variable interest rates tend to be lower but can be modified if market conditions change thus risking a significant increase in your monthly installments.
APR
APR stands for Annual Percentage Rate, it’s the annual cost of the loan and includes interest, service charges, loan fees, insurance, and other items. Since it includes almost every aspect of the loan it’s an excellent way to compare loan quotes. However, as stated, it includes only almost every aspect. There are some factors that cannot be measured, are too difficult to measure or have a different value for each person according to their financial and credit situation. Thus, these extra variables cannot be included into this percentage.
Other Things to take into account
The Personal Loan flexibility should be taken into consideration too. Being able to repay the loan early if you run into extra cash or get grace periods if you happen to suffer a momentary reduction on your income are two worthy features. However, the actual value of these features cannot be calculated in advance and thus are not included in the APR.
There are also some fees that due to their nature are not included in the APR, some of them are: Arrangement fees, closing costs, set up fees, Administrative fees, etc. Since the APR is calculated with a procedure established by the federal government, these fees and costs (not present on all kind of loans), where not contemplated and thus are not included in the APR formula.
Be aware that some low APRs, are only available for a promotional introductory period. After the period has ended, the APR may skyrocket, so make sure you read the fine print and do your comparison with the real APR. Finally, you should be especially careful with penalty fees that are charged when you miss payments or pay late which can turn out to be too onerous too and are not included in the APR.
