4 tips for choosing the right personal loan

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Do not take out a personal loan without reading this.

Key points

  • Personal loans can be an affordable way to borrow money.
  • You may want to use a personal loan for large purchases or to consolidate debt.
  • There are several key factors that go into choosing the right loan, including loan size.

A personal loan is a flexible loan that is often more affordable than other borrowing options. And the funds from the personal loan can usually be used almost any way you want. That’s why these types of loans can be a great option for refinancing and consolidating other debts, like credit card debt. And if you need to make a purchase that you can’t afford to save up for, you might want to use a personal loan to do it.

If you have decided to take out a personal loan, you need to make sure you get the one that best suits your needs. Following these four tips can help you achieve this.

1. Know how much you need to borrow

Different personal lenders have their own minimum and maximum loan limits. You need to calculate exactly how much money you need to borrow so you can choose a lender who will give you enough, but not force you to take on more debt than necessary.

Remember that the higher your loan balance, the more expensive your loan will be and the harder it will be to repay. Limit your borrowing to the minimum amount required to achieve your goals.

2. Choose wisely between fixed rate loans and variable rate loans

You will probably have the choice between a fixed or variable rate personal loan. Variable rate loans seem attractive in some cases because the starting interest rate is usually lower than that of a fixed rate loan. But since it is variable, it is linked to a financial index and can change.

You take a huge risk with a variable rate loan because your loan could become much more expensive. This is especially true now that the Federal Reserve (the central bank of the United States) is raising interest rates in order to fight inflation. The Fed is raising the rates banks pay when they borrow overnight from other banks, but that also affects the cost of consumer debt.

You’ll almost certainly be better off choosing a fixed-rate loan option because even if you end up paying a slightly higher rate up front, your payoff will be predictable and your monthly costs won’t increase over the life of the loan.

3. Understand this key trade-off

You will also need to choose the length of your loan or the length of time you want to take to pay off your debt. And there is a trade-off to consider when making this decision. You can either have:

  • A shorter repayment term, which has higher monthly costs because you have fewer installments to pay it off in full but costs less over time since you’re not paying interest for as long.
  • A longer repayment period, which has lower monthly costs but higher total costs since you pay interest for longer.

Think carefully about whether you’d rather be in debt longer but have more flexibility in your budget due to lower payments. For many people, it makes sense to opt for the shortest repayment term possible, as it makes no sense to make the loan more expensive than necessary.

4. Shop around for different lenders

Finally, you’ll want to be sure to shop around as loan rates and terms can vary widely from lender to lender. Getting at least three or four different quotes can help you get the best loan for your situation.

By following these four steps, we hope you can make a wise borrowing choice and get a loan that you can easily repay and help you achieve an important goal.

The Ascent’s Best Personal Loans for 2022

Our team of independent experts have pored over the fine print to find the select personal loans that offer competitive rates and low fees. Start by reviewing The Ascent’s best personal loans for 2022.

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