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Step 1
Compare the interest rates side-by-side. First, you need to know what the interest rate is on the loan. The lender should disclose this information before you sign anything. Theoretically, a loan with an interest rate of five percent will cost you less to borrow than a loan with a six percent interest rate. However, there will be other loan fees that you will need to factor in with the interest rate to determine the total cost of the loan. Simply comparing the quoted rates offered by different lenders is a good first step when you are considering taking out a personal loan.
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Step 2
Know the annual percentage rate (APR). This is the actual rate you will be paying on the loan. The APR combines both the interest rate and all of the fees associated with the loan and is then expressed as a percentage. Therefore, it is typically a much more accurate figure to rely on when calculating how much your loan will actually cost you.
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Step 3
Understand the difference between fixed interest rates and variable rates. A fixed rate is locked in for the life of the loan. It will stay the same even when the prime lending rate changes. A variable or adjustable rate will fluctuate depending on the prime lending rate. Therefore, if the lending rate goes down in the market then your payment will decrease. However, if the prime rate goes up then your payment will also increase. Choosing an adjustable rate loan will likely make it very difficult for you to predict the amount of your monthly payments. Many lenders will offer an introductory period of twelve or twenty-four months with an adjustable rate loan in which the interest rate is locked in for this specified time frame. These lenders will often try to entice you to borrow with a variable rate by offering an incredibly low interest rate during this period. Once the introductory period ends, the interest rate is subject to change. Fixed rate loans are typically a safer bet. You know how much your payment will be for the life of the loan, so you know if you can afford it. Adjustable rate loans are more of a gamble. Most people who prefer this type of loan plan to pay off the loan before the introductory period ends or intend to refinance once it is over. Just be careful when considering this option because you might not be able to pay off the loan in the time frame you anticipated, and you might not be able to get approved to refinance.
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Step 4
Consider the term of the loan. If you can, shorten the length of your loan to save a significant amount of money. The longer the term of the loan, the more you will spend on interest.
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Step 5
Watch out for default rates. When comparing interest rates for personal loans, you need to be aware of each lender's default rate. This is the interest rate you will pay if you are late making your payment or miss a payment. You need to compare default rates as well as interest rates when choosing a lender because some lenders charge double and even triple the original interest rate for late payments. Some may even permanently change your original interest rate to the default rate if you are late just once. This can make a huge difference in how much your loan costs you.
