Personal loans are ideal for people who require a single payout of a specific amount of money. Unlike revolving credit like credit card debt, a personal loan comes with a set monthly repayment schedule and term. While several financial institutions now offer personal loans, most banks require borrowers to have a credit score of above 670 to qualify for one. Let’s look at what you should consider when comparing a personal loan.
Understand the Loan Type
We can compare personal loans based on whether they require collateral. Personal loans generally fall under the following two categories:
Unsecured loans: These do not require any collateral as a loan guarantee and generally come backed by a co-signer. These loans are common and are usually available to individuals with good credit history. The downside is that if you default on payments and can’t repay the loan, this information passes on to credit rating agencies. A bad debt like a personal loan in collection can substantially damage your credit score.
Secured loans: Individuals with low credit scores can still qualify for a personal loan. Lenders could offer the option of a loan secured by an asset such as a home, savings account, or car. If the borrower cannot make the monthly payments, the lender takes possession of the leveraged asset.
Check the Interest Rate
Interest on a loan can become expensive over time, and it is essential to consider what kind of interest rate the loan carries. Interest rates on loans are either fixed or adjustable.
Fixed-rate loans: A fixed interest rate loan gives you the benefit of having a static interest rate throughout the loan period. Knowing exactly how much you’ll have to repay every month can help you organize your finances and budget for savings.
Adjustable-rate loans: Adjustable-rate interest depends on several factors and varies with fluctuations in the economy. Fortunately, regulations prevent interest rates from rising unchecked. While flexible interest rates often start low, they increase over time and lead to unpredictable monthly installments.
Once you know what to look for, you’ll find that comparing personal loans isn’t difficult. We recommend speaking with your financial advisor before signing up for a personal loan.