Annual percentage rates are what matter most

Jordan Wathen, The Motley Fool
Published 7:00 a.m. ET June 12, 2019

Comparison shopping for the best personal loan may not be fun, but it’s certainly worth your time. Consider that over the full term of a three-year loan, even a $10 difference in monthly payments adds up to $360 – no small amount of money.

Below I’ll discuss the best way to compare personal loans, as well as some tricks you can use to get the best rate on your next loan.

How to compare personal loans the right way

When it comes to comparing personal loans, the annual percentage rate (APR) on the loan is what matters most. The APR is a percentage that reflects how much a loan costs on an annual basis, including interest and applicable fees. The interest rate alone doesn’t tell the whole story, so APR is the best way to compare two loans on an apples-to-apples basis. In the United States, lenders are required to provide an APR when making a loan offer.

Getting the best deal on a personal loan

The personal loan market is as competitive as it has ever been. Thanks to the internet, borrowers can get a quote from several different lenders in a matter of minutes, whereas getting quotes from multiple offline banks would take a whole day of driving from branch to branch.

There are a few things you should know about shopping for the best loan terms:

1. You won’t hurt your credit score. The best online personal loan providers now enable borrowers to get a quote for a loan with a soft credit check. That means you can get quotes from 20 different lenders without getting a hard inquiry on your credit report, which in turn means your credit score won’t take a hit. Only when you accept a loan will a lender do a hard pull of your credit for verification purposes.

2. Repayment terms matter. The longer you take to repay a loan, the higher the APR will be. A shorter loan term lowers your APR by reducing the amount of interest that accrues on your balance.

3. A cosigner may help. Some personal loan companies allow you to have a cosigner when getting a loan. If you have bad credit, a cosigner can make a big difference in the rate you receive, but finding a cosigner won’t be a walk in the park. If you fail to make payments, the cosigner is legally responsible for the balance.

4. Some lenders have special deals. Some companies offer lower APRs to borrowers who meet certain criteria. For example, some of the best personal lenders offer a rate discount to people who have good credit scores or who agree to set up automatic loan payments from their checking accounts.

5. Paying down small card balances can help. If you have any small debts, paying them off before you apply for a personal loan may help you qualify for a bigger loan or a lower APR. Lenders can figure out how much you owe on other debts each month from your credit report, which they can use to determine how capable you are of making payments on a personal loan. If you have a handful of low balances, eliminating them before applying for a personal loan could be advantageous.

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Realistically, your ability to get a lower rate on a personal loan is limited only by your willingness to shop around. Of course, it’s probably not worth applying for 100 different loans just to shave 0.1% off your APR. Getting a quote from three different lenders, however, will give you some idea of what you can expect to pay for a loan and what sort of APR you’re likely to get.

The skinny on personal loans

Personal loans can be used for just about everything, but they’re most practical when they’re used to consolidate high-interest debt. For example, using a personal loan with an 8% APR to refinance $5,000 of credit card debt at an 18% APR can save you nearly $867 in interest over a three-year repayment period. That’s some serious savings!

Personal loans can also be used for consumption. You can use them to pay for moving expenses, home improvements, or a vacation. It goes without saying, though, that using a personal loan for “wants,” rather than “needs,” can be costly. Using a $3,500 personal loan to pay for a vacation of your dreams may be fun, but making monthly payments of $110 or more for the next three years certainly won’t be.

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.


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