Don’t Ever Accept Your First Loan Offer, and Some Other Tips –

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Personal loans can provide an affordable alternative to credit cards and help you finance life’s big purchases while saving on interest.

Increasingly, personal loans are growing in popularity, with roughly 20.2 million borrowers in the U.S. according to the online lending marketplace Lending Tree.

It’s critical that you have a clear repayment plan, whether you’re looking to take out a personal loan to consolidate debt, finance a home improvement, fund your next big trip or pay for a cross-country move.

Below, Select offers 10 questions you should ask yourself to make sure you’re well prepared for a new personal loan

Personal Loan Dos

Do: Check your credit reports

Your credit score and credit history are major determinants in the interest rate you receive on a personal loan. Banks use credit as a barometer for risk. If you have made payments in a timely fashion before, then you are more likely to repay your loan. Therefore, the better your credit, the lower your rate. Generally, rates will range between 4 and 36%.

Due to the COVID-19 pandemic, the three major credit bureaus (Equifax, Experian, and TransUnion) are offering free weekly reports at through April 2021. As due diligence, we recommend pulling your credit reports to make sure they’re in tip-top shape. An error (say, missed payments or a credit card fraudulently attached to your name) can wreak havoc on your credit score, so check for accuracy and dispute any information that isn’t correct.

Do: Compare the APR

The difference between a low interest rate and a higher interest can be major. Let’s say you have a $10,000 loan with a 5-year term. Over those five years, the difference in overall cost between a 10% APR and 25% APR would be $4,862.56. We always recommend shopping around before committing to a lender, as each one weighs your application information differently.

Do: Consider the risks if you have bad credit

If you have a credit score less than 670 (“good” by FICO standards), you may find it harder to get a decent interest rate on a personal loan. Additionally, those who have filed for bankruptcy or have not established a credit history will experience difficulties getting a loan.

People who find themselves in that boat may need to consider a cosigner to improve their odds of getting approved. A cosigner is a secondary borrower who can boost your loan application by offering their (presumably good) credit history. It provides reassurance to the bank that the loan won’t be defaulted upon, because there is a backup person who would be responsible.

Adding a cosigner can grease the wheels on an offer and even merit you a better rate than if you’d applied alone. But the risk is if you miss a payment, then you and your cosigner would experience a credit score decrease.

You may also need to consider a secured loan if your credit isn’t good enough. Most personal loans are unsecured, so putting up collateral (in the form of a house, car, or bank or investment account) gives the bank leverage in a situation where you may not be an attractive candidate. The interest rates on secured loans are often lower, though, of course, you take on significantly more risk if you cannot afford the payments at some point down the line. Defaulting on a secured loan could allow the bank to seize your collateral, meaning you could ultimately lose your house, car, or whatever else you put up for collateral.

Do: Look closely at the fees

Take a fine-toothed comb to your loan offer before accepting. You want to make sure you understand everything in the contract; otherwise, you may have to be forced to pay surprise fees in the future. These are the most important aspects of the personal loan to evaluate:

  • APR: What is the interest rate? Is it fixed or variable? Is the rate lower than the one on your credit card? If not, then taking out a loan may not be worth it.
  • Repayment period: How long will you be making monthly payments, and at what point will the loan need to be paid off?
  • Monthly payments: Can you afford the payments? Do they fit into your budget?
  • Secured or unsecured: Will you need to put up your bank account, for example, as collateral for the loan? Or does it not require collateral?
  • Origination fee: Do you have to pay a fee up front for the loan, and if so, what does it cost? Is the lender being transparent? Keep in mind that many lenders that don’t require this fee still charge it anyway. It’s just reflected in your interest rate.
  • Prepayment penalty: Will you be penalized with a charge if you want to pay off the loan early?

Do: Get pre-qualified by multiple lenders

Pre-qualification is a process where you self-report your financial information and desired loan terms to get an informal estimate of what personal loan you’d be qualified for. This step is different from getting a pre-approval or actually applying for the loan, because it doesn’t require the lender to review and verify your documents and it won’ result in a hard credit inquiry that would decrease your credit score by a few points. And pre-qualification doesn’t mean you’re actually approved; it just tells you whether you’re likely to be approved and what your loan terms might be.

Getting pre-qualified is a quick, often instantaneous process that allows you to see what loan amount, interest rate, and terms you would receive. You can get pre-qualified by an unlimited number of lenders. We recommend getting estimates from at least three lenders so you can understand what is available to you, based on your credit profile.

Personal Loan Don’ts

Don’t: Accept the first loan offered to you

Always shop around before committing to a loan. It’s not just the obvious banks that are offering personal loans now. You can also find them at credit unions, community banks, online banks, and online lenders, many of whom could offer you a better rate than your garden-variety mega-bank.

All lenders evaluate applications differently, with variables like income and credit weighted differently depending on the criteria. So you may find one bank doesn’t like that you were laid off from a job, while another doesn’t care because you have an “excellent” credit history. It all depends on factors outside your control, so make sure to expand your options.

Don’t: Take out the maximum loan possible

We don’t recommend taking out a big loan just because you can afford it. A loan payment that seemed manageable upon approval may be a mistake down the line, if you unexpectedly lost your job, for example. Farnoosh Torabi, finance journalist and host of the “So Money” podcast, recommends people not take out a loan payment that accounts for more than 5 to 10% of their monthly budget. Overborrowing can be just as dangerous as paying for something outright that you can’t afford.

Don’t: Skimp on payments

Schedule automatic withdrawals or monthly reminders to pay your personal loan. Payment history accounts for 35% of a FICO credit score, followed by credit utilization, length of credit history, credit mix, and new credit. Missing payments, or paying late, can hurt that credit score and make it difficult to get approved for loans, credit cards, or even apartment leases in the long term. Set yourself up for success now and put that recurring note on the calendar. You’ll thank the future you later.

What other choices do I have?

If you’re looking to pay off debt, balance transfer cards are another option.

With a limited-time promotional 0% APR, a balance transfer card allows you to pay zero interest for up to 21 months, easily saving you hundreds.

And depending on your situation, you may also be able to transfer more than one credit card balance to the new card (as long as the total doesn’t exceed your credit limit).

Some of the best no-interest credit cards that offer balance transfers are the Citi Simplicity® Card, the U.S. Bank Visa® Platinum Card and the Wells Fargo Reflect℠ Card.

However, balance transfer cards have a few draw backs, including balance transfer limits (which is often lower than your actual card limit) and balance transfer fees (typically 3%), unless you can get a no-fee alternative like the Wings Visa Platinum Card.

In addition to balance transfers, 0% APR credit cards are also excellent for financing large purchases that you want to pay for over time. Here are our top choices for no-interest balance transfer credit cards:

Best for 21 months

  • Citi Simplicity® Card
  • Wells Fargo Reflect℠ Card

Best for 20 months

  • U.S. Bank Visa® Platinum Card

Best for 18 months

  • Citi® Double Cash Card

Best for 15 months

  • Amex EveryDay® Credit Card
  • Capital One® SavorOne® Cash Rewards Credit Card

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