Finding the best personal loan for yourself can be stressful, especially if you’re facing a financial emergency. These tips can help find the best APR options for your credit score.
It’s best not to spend money you don’t have if you can avoid it, but that’s not always possible. Whether you’re planning to finance a big expense or you have to deal with a financial emergency outside your usual budget, you will likely reach a time, if not many times, in your life where you need to take out a loan.
While you may be tempted to sign with the first lender who will offer you the funds you need, especially if you’re facing an emergency expense, your long-term financial health will be better off if you stop and take time to find the best personal loan option available to you. Ideally, when searching for the best personal loan, you want:
- A loan with the lowest APR your credit score will allow
- Fewer payment fees
- Payment terms that work within your budget
- A lender with clear and transparent practices
APR’s impact on the best personal loans
The Truth in Lending Act requires lenders to present loan costs in terms of APR, or annual percentage rate. That’s a number that takes into account the full cost of a loan over a year, including interest rate and any additional costs like origination fees or other finance charges. This allows borrowers to make a comparison between different loans, even if each borrower uses a different payment structure.
Generally, you’ll want to look for a loan offer with the lowest APR possible. The better your credit score, or FICO score (FICO stands for Fair Issac Corp. — the company that originally developed the FICO scoring model), the better APR range you should be able to access.
Finding the best payment terms for your situation
While a lower APR tends to translate into a more affordable loan, finding the best personal loan is not always as simple as just looking at different numbers and picking the lowest one. Depending on your needs and budget situation, other loan term factors may be almost as important as the APR.
Factor No. 1: Long- vs. short-term loans
Some short-term loans, such as payday loans, have both high APRs and short payment terms, often requiring the borrower to pay back the entire loan amount plus a large fee in just two weeks. If you can’t pay back the whole loan amount in time, you may have to pay the fee again to extend the loan term for another two weeks. This is why payday loans can have APRs as high as 400% – even with their short payment terms.
Installment loans, on the other hand, have longer payment terms, usually in the form of biweekly or monthly payments. While longer repayment terms could lead to paying more interest over the life of the loan, spreading out the payments might make it easier to fit into your budget. As long as an installment loan doesn’t have any prepayment penalties, it could make sense to choose that option over a short-term loan, even if they have similar APRs.
Factor No. 2: Prepayment penalties
Prepayment penalties are fees that a lender charges a borrower if they pay off their loan balance early. Prepayment penalties are more common with mortgage loans than other kinds of personal loans, but it’s always worth checking with your lender to confirm the terms of your agreement. As long as your installment loan doesn’t have prepayment penalties, and as long as you can afford it, you’ll be able to save money on interest by paying off the loan early.
Factor No. 3: Discounts and leniencies
You can ask a potential lender if they offer an autopay discount, which could help to remove the risk of forgetting payments while saving you money on interest. Some lenders may offer an unemployment protection option, which is essentially insurance in case you lose your job while you’re still paying off the loan.
Factor No. 4: Budget considerations
Regardless of your loan’s specific terms, it’s important the payment amounts fit into your weekly or monthly budget. The last thing you want is to end up worse off than you were before borrowing. Missed payments or defaults will find their way to your credit report, which will only make borrowing harder.
Good credit, better personal loan options
Your credit score is one of the most important factors in determining the quality of loans you can borrow. Your experience may differ in the following ways, depending on your score:
- If you have excellent credit: Finding a loan with flexible payment terms and a reasonable APR might be as simple as walking into a bank where you already have an account and asking for one.
- If you have fair credit: You may need to do more searching to find your best option.
- If you have bad credit: You’re still going to want to research the best option available, but it may be more expensive or risky than you’d like.
Your credit history, which is more or less a record of your debts and payment history, is the most important factor in determining your credit score.
The second most important factor is the amounts you owe. That means if you are already feeling bogged down by debt, it may be better to wait on taking out a new loan. Instead, start working toward paying down any credit card debt or other loan balances before looking to borrow again.
Finding the best lender for a poor credit score
Unfortunately, it takes time to fix a spotty payment history. If you’re facing a financial emergency, that might require time you don’t have. So how can you choose the best personal loan lender for your credit profile?
Tip No. 1: Do your research
If you’re considering online lenders, be sure to look at a range of customer reviews and investigate each lender’s online application process to help guide your decision. For example, one process you may want to investigate is how each lender conducts their credit checks.
- If a lender uses a hard credit check to determine loan approval, then your credit score may take a short-term hit.
- However, some lenders utilize hard credit check servicers that are able to provide an overview of your credit history without impacting your FICO score.
- Online lenders that perform a soft credit check or no credit check at all as part of the application process will not impact your FICO credit score.
While approval regardless of creditworthiness might sound nice, a no credit check loan may still require proof of income and will often have much higher interest rates or require collateral.
Tip No. 2: Consider your needs vs. limitations
Loans that require collateral are called secured loans. Collateral is a valuable item that a lender can seize if the borrower doesn’t make their payments on time. In the case of a title loan, that means a vehicle. In the case of a mortgage, that means a home. In the case of a pawn shop loan, that could be nearly any item of value. While secured loans can be a path to qualifying for a loan with a lower interest rate than you may otherwise be able to access, the rates can still be quite high. Only put up collateral you can risk losing.
Tip No. 3: Consider a cosigner
You could consider a cosigner if you have a friend or family member with better credit or higher annual income who is willing to help you secure a loan. Of course, if that friend or family member is willing to loan funds to you directly, that’s likely going to be the lowest rate you can find.
Depending on the loan purpose, there might be other options for your wallet beyond cycling through different loan applications.
Option No. 1: Look into a credit union
You can also consider signing up with another type of financial institution like a credit union. Some credit unions offer payday alternative loans with more competitive rates that could help you when you’re in a bind.
Option No. 2: Research assistance resources
If you’re considering a loan because you’re coming up short on rent, there are government programs and nonprofit organizations that may be able to help. If medical expenses are your problem, you may be able to negotiate by speaking to your provider before taking out a loan for medical bills.
Option No. 3: Consider debt consolidation
If you are looking into a debt consolidation loan in an attempt to improve your debt-to-income ratio or make your monthly loan payments more manageable, be sure to check that this kind of refinancing process will actually leave you better off in the long run. We actually have a personal loan calculator designed exactly for this purpose.