4 Tips for Choosing the Right Personal Loan

Don't take out a personal loan without reading this.

A personal loan is a flexible loan that is often more affordable than other borrowing options. And funds from the personal loan can usually be used almost any way you want. That's why these kinds of loans can be a great option for refinancing and consolidating other debt, such as credit card debt. And if you must make a purchase you can't afford to save up for, you may want to use a personal loan to do so. 

If you've decided you are going to take out a personal loan, you need to make sure you get the right one for your needs. Following these four tips can help you do just that. 

1. Know how much you need to borrow  

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

Remember, the higher your loan balance, the costlier your loan will be and the more difficult it will be to pay back. So keep your borrowing to the minimum amount required to accomplish your goals.

2. Make a smart choice on fixed vs. variable-rate loans

You will probably have a choice of a personal loan with a fixed rate or a variable one. Variable-rate loans seem attractive in some cases because the starting interest rate is usually lower than on a fixed-rate loan. But since it's variable, it's tied to a financial index and can change.

You take on a huge risk with a variable-rate loan because your borrowing could get a lot more expensive. That's especially true now with the Federal Reserve (the U.S. Central Bank) raising interest rates in order to help fight inflation. The Fed raises the rates the banks pay when they borrow overnight from other banks, but that also affects the cost of consumer debt. 

You are almost certainly going to be better off choosing a fixed-rate loan option because even if you end up paying a slightly higher rate upfront, your payoff will be predictable and your monthly costs won't rise during the life of the loan.

3. Understand this key tradeoff

You're also going to have to choose your loan term or how long you want to take to pay off your debt. And there's a tradeoff to consider when making that decision. You can either have:

• A shorter repayment period, which has higher monthly costs due to the fact you have fewer payments to repay it in full but which costs less over time since you don't pay interest 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 for longer but have more flexibility in your budget due to lower payments. For many people, it makes sense to opt for the shortest payoff time possible because there's no sense in making borrowing more expensive than necessary. 

4. Shop around among different lenders 

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

By taking these four steps, hopefully you can make a smart borrowing choice and get a loan you can easily pay back that helps you accomplish an important goal.