How to Compare Personal Loans

If you're considering borrowing money from a financial institution, it's imperative that you have the knowledge needed to compare and weigh the various offers you'll receive from lenders. There's a lot more to loan terms than interest rates on the capital you borrow. You'll also need to consider the purpose of the loan in the context of the loan repayment terms.

Difficulty: Moderate

Instructions

Things You'll Need:

• Financial adviser (recommended)

Compare Personal Loans

1. Understand the various types of personal loans. Broadly speaking, there are two categories: unsecured and secured. An unsecured loan does not require you to offer any collateral to the bank and, as such, they always come at a higher interest rate. Secured loans are available at lower interest rates, because the bank holds a piece of your property in trust until you pay back the principal and interest.

2. Keep in mind that the term of the loan has a direct bearing on the interest rate. Shorter-term loans (loans that are paid back over a relatively brief period of time) have higher interest rates than long-term loans.

3. Familiarize yourself with the concept of "annual percentage rate," abbreviated to APR. This is the amount of interest your loan accumulates for every $100 borrowed. For example, a 12.9 percent APR means you'll accrue $12.90 in interest each year for every $100 borrowed. Loan interest is usually compounded monthly, so you can find your monthly interest rate by dividing the APR by 12.

4. Keep in mind that many lenders also build in loan fees, and all loans are subject to default penalties. Thus, you'll want to consider these in addition to the APR when you compare personal loan terms.

5. Compare personal loan terms by sitting down to do the math. Factor in the fees with the interest rates, then calculate how much money you'll actually spend to repay the loan in its entirety. You may find that a lender offering a loan with lower fees and higher interest rates may be a better long-term bet than higher fees and lower rates.

6. Evaluate loan offers with the help of a financial adviser if you're having problems determining which one is best for you.

Tips & Warnings

• Never sign a loan if you don't understand the terms you're agreeing to in their entirety. You're legally committed to the terms you sign off on, and you risk losing your collateral or severely damaging your credit rating if you can't or don't pay up later.