Evaluating a Personal Loan Offer

Personal loans provide an option for people to borrow money for major expenses that don’t have a specific lending procedure—such as buying a house or vehicle. No matter how much you’re borrowing, however, you’ll want to look at these things when evaluating a personal loan offer.

What Are the Loan Terms?

When you’re evaluating any kind of loan offer, there are a few things you need to look at right away to help determine if it’s a good option for you. Most people don’t spend all their time dealing with financial terms, which can make applying for loans a confusing process for many.

The first of these things is the interest rate, which is sometimes referred to as the APR (annual percentage rate) on most types of consumer loans. This simply refers to the percent of the amount owed (either principal or current balance depending on the loan) that will be paid in interest. For instance, a simple loan for $100 with 10 percent interest with a term of one year would mean you have to pay back the original $100, plus 10 dollars in interest.

This can get much more confusing when you start looking at loans that deal in compounding interest. Compounding interest is where you’re not just charged interest on the original amount (principal), but also the interest that has accumulated on it. Credit cards often come with compounding interest, which is part of the reason why it’s so easy to let credit card account balances get out of control. Fortunately, personal loans generally just use simple interest, as you’re not dealing with a revolving balance like with credit cards.

There is, however, another aspect to consider when it comes to APR: whether it’s fixed or variable. The difference is simple: Fixed rates don’t change, while variable rates can fluctuate up or down based on market conditions. Generally, you want to lock in a fixed rate at the lowest possible APR. When dealing with personal loans, you’re probably only going to be seeing fixed-rate offers; but this is something you need to check. Variable rates can swing dramatically over time, and make it more difficult to predict your monthly expenses.

How Are You Planning to Use the Money?

How you are planning to use the money from personal loans can make a big difference in determining if they are a wise choice or not. There are many reasons why it can make sense to get a personal loan. For instance, consolidating debt, making home improvements, financing a major asset purchase, or helping to pay for an emergency are all valid reasons for getting a personal loan.

On the other hand, there are also some pretty poorreasons for getting a personal loan. It’s essential you remember that you have to pay back all the money you borrow with a personal loan. If you’re just taking out the loan to spend on things that aren’t necessary, or don’t have lasting value, you’re likely to regret it later when you’re making payments on something that has already passed its.

Will Improving Your Credit Significantly Change the Deal?

Before you go ahead and sign up for any loan agreement, it’s important to consider whether making some changes to improve your credit might make a noticeable difference in the terms of a personal loan. Without a doubt, your credit score is going to dictate the interest rate of a personal loan, and even if a lender is willing to extend you credit at all.

Consider if you might be able to raise your score before going through with the loan application process—especially if you don’t need the money right away and you’re pretty close to getting bumped into a better credit bracket. Your payment history and credit utilization account for about 65 percent of your total credit score. Ensuring you’re paying bills on time and not using more than 30 percent of your available credit can help you improve your score.

Personal loans can be a great way for people to get financing for somewhat unconventional things. While there can definitely be benefits to getting a personal loan, make sure you thoroughly evaluate it before making any decisions.

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