Sooner or later, you’ll be in a position to get a personal loan. It might be to help you start a business, afford a home renovation, or finance some other personal project. But regardless of what you’re using the loan for, the loan itself has the power to significantly impact your financial health, for better or worse. So it’s in your best interest to get the most favorable personal loan you can.
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What’s a “Better” Loan?
So what counts as a “better” personal loan?
There are several factors to keep in mind:
- Interest rate. Your interest rate might seem innocuous, but thanks to compounding, even a one percent difference can add up to make a massive difference in the total amount of money you pay. The lower your interest rate is, the better. You’ll also want a fixed rate over a variable rate in most situations.
- Fees and conditions. Some loans have origination fees or other fees that force you to pay more to get a loan (or pay it over time). Others may charge you extra under certain conditions, like if you pay off the loan too soon.
- Payment terms. There are different ways to pay back a loan. For example, most personal loans require you to pay back a portion of your principal and interest every month, but some require you only to pay interest, eventually paying back the principal in full at the end of the loan (a balloon loan). Different loans may be more advantageous to you than others.
- Some loans are secured, which means you’re required to have some kind of collateral, like a house, a car, or some other item of value. Others are unsecured, which are generally more favorable.
Strategies to Get a Better Loan
So what can you do to get a better loan?
- Improve your credit score (or play to your strengths). Your credit score plays an important role not only in what types of loans are available to you, but also what kind of interest rate you can get. While it’s certainly possible to get a loan with bad credit, a better credit score will work in your favor. You can improve your credit score by paying off your existing debts, making all your payments on time, avoiding opening too many new accounts, and maintaining those good habits for a period of months to years. If you’re dealing with a bad credit score, it may take years to get it back into manageable
- Shop around. Your best strategy is to shop around with different loan providers before making a final decision. Regardless of your credit score and personal situation, a different loan provider may have a very different offer for you. Sometimes, you’ll find a financial institution capable of giving you a strictly better deal, with lower fees and a better interest rate. Other times, you’ll merely find terms and conditions that work in your favor. Either way, getting multiple offers will work in your favor.
- Be open to secured loans. Intuitively, you might guess that unsecured loans are better than secured loans; you won’t have to offer a piece of personal property to get the money. However, most banks will be able to offer you a lower rate, or more competitive terms, if you’re willing to stake something as collateral. That doesn’t mean secured loans are better for every person or every situation, but they shouldn’t be written off as undesirable. Ask your competing financial institutions if securing the loan could get you a better rate.
- Read the fine print. Before you sign off on the final loan agreement, read the fine print and make sure you understand all the terms and conditions. Though not a common practice, it’s possible that your bank could include extra fees or more restrictive terms without explicitly making you aware of them.
- Finally, improve your negotiation skills. If you’re applying for a loan and have the opportunity to talk to a loan officer or financial institution representative, spend some time pushing for more favorable terms. Some banks will be strict on what they can offer you, based on your credit history and the type of loan you’re applying for, but in other cases, you might be able to get something better just by asking for it.
Pushing for small improvements in your personal loan, like a slightly better interest rate or the removal of fees, may not seem like a big deal, but over time, it can have a massive positive impact. Learn more about the types of personal loans that are available, and work proactively to get the best loan possible for your situation.