When taking a loan, regardless what kind, you should always make sure to get the best possible deal from your lender. Borrowing money does always come with a price, but by comparing loans from multiple lenders you can lower the total cost of your loan and make it easier to become debt-free.
This is also extra important to keep in mind when taking a personal loan, which is usually made without security. The interest for that kind of loan tend to be higher than mortgages for example, and there is a lot of money to be saved if you put a bit of effort in.
What to consider when taking a personal loan
Personal loans tend to be made without collateral, meaning that the lender has less security. In extension, the interest tends to be higher. The interest rate on your personal loan plays a significant role in the total cost of your debt, which is why it’s important to look at the interest before taking a personal loan. The overall cost of your loan is also affected by fees and charges that are applied, so make sure to read the loan terms thoroughly before signing up to anything.
Loan term, how long your loan lasts, is also something you need to consider before getting a loan. Personal loans with long loan term might seem like an attractive option – but the longer your loan term, the higher total cost. This is because it will take you longer to repay the loan and because of this pay more interest overall.
It is also useful if your personal loan comes with repayment flexibility. This can include allowing of additional payments, that you can pay in lump-sums. This allows you to repay the loan ahead of time if your finances allow it and that will save you from paying additional interest.
How to lower the costs by comparing multiple lenders
Comparing multiple lenders is a simple but very effective way of ensuring good terms for your loan. Generally, there are three key points that we recommend you to look at:
- APR, the annual percentage rate
- The repayment period
- Fixed or variable rate
The APR is the main point of the three and includes both interest and extra charges such as set up fees. The higher your APR, the higher your repayments and total cost over time. Make sure to compare the APR between different lenders and go with the one that offer the lowest rate. Some loans, such as payday loans, usually have high APR and should be avoided if possible.
Repayment period, as we mentioned earlier, also affects the total loan cost. Always try to go for the shortest repayment period possible, in order to save you from paying unnecessary interest. When it comes to fixed or variable rate it´s all about personal preference. With a fixed rate you will know the exact cost of your loan each month. Variable rates can be cheaper, but there is always a risk that they will go up and make your loan more expensive than expected.
The advantages of combining loans
One way to simplify your finances is to combine all your loans together, if you´re juggling multiple debts. Debt consolidation means that you combine your debts into one single loan – which means one loan, one regular payment and one interest rate. This might be a good idea for you if you can get a lower interest rate, which will help you save money in the long run.
Debt consolidation is a smart move to make in a lot of cases. Typically, when your total debt doesn’t exceed 40% of your gross income, if your credit score qualifies for a 0% credit card or low-interest debt consolidation low and if your cash flow covers the debt payment. If this is the case for you – debt consolidation is more than likely a smart move to make.
It is possible to consolidate multiple loans even if you have debts with multiple lenders. Debt consolidation can, in addition to help you save money, also help your credit if you make on-time payments.
Things to keep in mind
Taking a loan is a long-time commitment and should be planned thoroughly. We do recommend that you make a list of all your needs and requirements in order to decide the amount of money you actually need. Like we said earlier, all loans come with a price tag and you should make sure not to make it any more expensive than it needs to be.
Also, evaluate your ability to repay the loan. Calculate the total cost, and make sure that you can actually afford the monthly payments before borrowing any money. Never borrow more money than you can afford, and don’t take unnecessary loans. Taking unplanned, high-cost loans can be damaging to your personal finances over time.