4 Top Considerations Before Picking a Personal Loan

If you're taking out a personal loan, you don't want to just borrow from the first lender you come across. In fact, just like when you get a mortgage or a credit card, you'll want to shop around and see what offers are out there before you commit to borrowing from any one particular financial institution.

If you're not sure exactly how to pick the best personal loan lender, you should be aware there are a few top considerations to think about.

1. What interest rate are you being offered?

The No. 1 consideration with a personal loan is your interest rate. If your rate is higher, your monthly payments are going to be higher, too. And you will pay a lot of interest to your lender over time, since a big portion of your monthly payment will go toward financing charges.

How much of an impact will your rate have? If you borrow $10,000 at 4% for 10 years, you'd pay $101.25 per month and $2,149.42 in total interest. But if you took the same loan at 10%, you'd pay $5,858.09 in total interest and $132.15 per month. That's a lot of extra cash just to borrow the same amount of money.

When you compare the interest rates on offer, confirm you're comparing apples to apples. Fixed-rate loans are safer because the rate and payment won't ever change. Variable-rate loans come with more risk because while the initial rate may start lower, it can rise over time. So decide if you want a fixed or variable rate and then compare it with similar loans only.

2. What fees will you have to pay?

Does your lender charge you an origination fee, prepayment penalty, or any fees that will add to your borrowing costs? You can usually find fee-free lenders, so think twice about whether it makes sense to use a company that charges fees.

3. How long will it take you to pay off your loan?

Your repayment timeline matters a lot in terms of how much your loan costs and, of course, it dictates how quickly you'll be debt-free.

A $10,000 loan at 5% repaid over 10 years would cost you $2,727.86 in total interest and would come with a monthly payment of $106.07. But the same loan repaid over five years would only cost you $1,322.74 in interest. Your monthly payment would be higher though -- $188.71 -- but you'd be debt-free sooner and make fewer payments.

If keeping monthly payments low is a key goal, then choose a lender offering a longer payoff period. But if you would rather pay less over time, a lender with a shorter timeline is the better choice.

4. What's the lender's reputation?

Finally, consider the lender's reputation. You don't want to borrow from a personal loan lender that is going to give you a lot of hassle by misapplying payments, making incorrect reports to the credit bureaus, or surprising you with fees.

By taking these four considerations into account, you can find the loan that actually makes the most sense for your situation.