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How to Compare Personal Loans

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If you’re taking out a personal loan, you want to make sure you get the best deal possible from your lender. After all, borrowing money always comes at a price, but the lower the total cost of your loan, the easier it will be to become debt free.

Finding the right loan for you isn’t always as simple as it seems, though, because there’s a lot to think about when deciding which lender to borrow from. To make sure you choose the right loan for your situation, follow these five tips when comparing loan offers.

1. Get quotes from at least three lenders -- and preferably more

A lot of lenders offer personal loans. This includes online-only lenders, local banks, national banks, and credit unions.

There can be major variation from one lender to another in terms of interest rates, repayment timelines, fees, and the time it takes to fund loans, so it’s important to get multiple quotes when shopping for a loan. Aim to get quotes from a minimum of three lenders, but preferably more if you can, so you don’t miss out on a better loan offer.

Choose different kinds of lenders too, as online banks often have lower rates and easier qualifying requirements than local banks and lenders do because they have less overhead.

2. Look for lenders that allow you to compare loan offers without hard credit inquiries

When you apply for financing, sometimes a hard credit inquiry is placed on your credit report. But too many hard inquiries can hurt your credit score -- and inquiries stay on your credit report for up to three years.

The good news is many lenders -- and many online loan comparison tools -- let you get pre-approved for personal loans and find out your rate and terms before a hard inquiry goes on your record. You provide your Social Security number and other basic information, the lender does a soft inquiry, then you find out what interest rate you qualify for. At that point, you can decide if you want to move forward with the lender and have a hard inquiry placed on your report.

By working with personal loan lenders that make it easy to comparison shop with soft inquiries, you can protect your credit score while finding the best deal on financing.

3. Make sure you’re always comparing apples to apples

When comparing loan offers from multiple lenders, make sure the type of terms (like loan term and interest rates) are similar, not just the monthly payment.

For example, if one lender offers lower monthly payments but a longer repayment schedule, you may end up owing more in total for that loan than you would for a loan with higher monthly payments due to the extra interest you'll pay.

Another key thing to look at is whether both lenders are offering fixed-rate loans (loans where the interest rate doesn't change). Loans with variable rates generally have lower starting interest rates than fixed-rate loans do. The loan may seem like a better deal because of this lower rate.

However, you’re taking on more risk with a variable-rate loan because the interest rate could rise during repayment. When the rate increases, total loan costs go up -- and so do monthly payments.

There are situations where a variable-rate loan makes sense, especially if you plan to pay the loan off early and can afford higher payments. But you want to compare loans with the same type of interest rate structure so you can get the best deal for either the fixed-rate or variable-rate loan you end up taking out.

4. Look at total costs

Because you want to keep borrowing costs as low as possible, it makes sense to look for the loan offering the lowest total overall costs -- including fees and interest rates.

When you look at rates, compare the annual percentage rate (APR) and not just the interest rate. The APR takes fees into account to show you what total rate you’ll pay per year for borrowing the money.

Your lender should also be able to tell you the total interest you'll pay over the life of the loan. This will be affected by your payment timeline as well as by how often interest compounds.

Knowing the total interest you’ll pay can help you choose the loan that will cost you the least in the end. And that's a better bet than focusing just on monthly payments or annual interest rate, which can paint a misleading picture if one loan has a longer loan repayment term or has more fees than another.

5. Read the fine print

You’ll also want to read the fine print for any loan you consider to find out all of the little details that could result in added costs.

Some lenders charge prepayment penalties, for example. In that case, if you wanted to pay your loan off early, you’d end up paying more for that loan than you might for a comparable loan without a prepayment fee. And some variable-rate lenders may adjust rates more often than others, which increases your risk of rates rising frequently during the repayment term.

You want a complete understanding of your loan so you’ll know all of the risks and potential charges you could incur. Only then can you make a fully informed choice about which lender is actually best.

Comparing loans the right way is worth the effort

Taking time to compare loan offers is important, as some lenders offer significantly better deals than others. You don’t want to pay more to borrow than you need to, so make sure you follow these tips when you shop around for your loan.

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