Is the Interest Rate the Only Thing That Matters When Applying for a Personal Loan?

Interest alone doesn't determine if a personal loan is right for you.

When you are applying for a personal loan, you'll notice you have a choice of many different lenders and loan terms. You'll want to pick the right loan to make sure your debt is affordable and that taking out the loan is a smart financial decision rather than one you'll come to regret.

While many people focus primarily on the interest rate of the personal loan they are taking out, the rate isn't the only key consideration. Here are a few other things to think about when you decide which loan option is the best one for you.

How long is the loan repayment term?

The two biggest factors that affect your total loan costs are your interest rate and repayment time period. Obviously, a lower rate reduces what you'll pay over time. But so does choosing a loan with the shortest payoff period.

If you extend your repayment term for a long time, even a low rate loan could end up costing more than an alternative option with a shorter payoff period but a higher rate. That happens simply because you end up paying interest for so much longer.

Of course, the benefit of a long repayment term is that the monthly payments are much lower than on a loan with a shorter payment period. You'll have to consider whether it makes more financial sense for you to pay off your loan ASAP to save on total costs, even if that means paying more each month, or if you'd rather prioritize affordable monthly payments even if that means incurring more interest expenses over the life of the loan. A personal loan calculator can help you better understand your options.

What upfront fees will you have to pay?

Many personal loans do not charge upfront fees, but some come with origination or application fees that can cost you. You need to take these into account when thinking about total loan costs. If a lender is offering a low rate but charging high upfront fees, you may want to look elsewhere to borrow.

Can you qualify for the loan?

You also need to look into the lender's qualifying requirements, as there's little use in applying for a loan you can't get approved for -- even if it does advertise a competitive interest rate.

Different lenders cater to different kinds of borrowers, with those offering the most advantageous terms typically requiring better credit and solid financial credentials. Make sure you apply with a lender looking for borrowers like you.

Are there any prepayment penalties?

Finally, you'll want to make sure whatever loan you're thinking about taking out doesn't charge fees for paying it off early. If your lender does charge a prepayment penalty, you could wind up in a situation where you have the funds to pay back your debt but have to choose between keeping the loan and continuing to pay interest or paying a high fee to get out of your loan early.

By taking all of these different factors into account, you can make sure you get the personal loan that's best for you. Each of these factors matters as much as the interest rate, so look at the big picture before you apply for a loan that you'll likely spend years repaying.