Which Loan is Right For You?

If you are taking out a personal loan, you should decide if you want a secured or unsecured loan. A secured loan is one that requires you, the borrower, to offer some sort of asset as collateral. Usually, this asset will be a large piece of property, such as your house. In other words, if you don't pay back your loan as promised in the agreement, your house will be repossessed by the lender. An unsecured loan, on the other hand, requires no assets from the borrower, thus you won't risk losing any collateral.

Most people find it very easy to obtain a secured loan, as lenders have nothing to lose in the deal. However, you should only consider them as a last resort. If you have a decent to excellent credit history, then always opt for an unsecured loan. Should anything unforeseeable happen and you are unable to make payments on an unsecured loan, at least you won't have your house on the line. If you have poor credit, you may still be able to get an unsecured loan, but your rates will be much higher. If it will save you significantly on your rates to get a secured loan, only in this extreme circumstance should you opt for one.

Find a Low Interest Rate

When comparing loans, you will be faced with two kinds of interest rates: fixed and variable. Don't even consider a variable loan if you want to lock in on a low rate. While the introductory APR may look attractive to you, a variable rate is susceptible to change, which means it can go lower or higher at any time during your repayment. You should assume the worst here and protect yourself from a potentially sky-high rate in the future. A fixed interest rate is just that, fixed in one place, indefinitely. Assuming you make a careful decision, you will be pleased with your fixed rate and never regret that you turned down a tempting variable rate.

You should never go with the first quote you are extended. Instead, seek out several lenders and compare their offers. (Note: Make sure you get these quotes within the same two-week period, as all of the credit inquiries will then only count as one.) Naturally, you want to find the lowest interest rate, but that shouldn't be your only deciding factor. Assuming that a few of your options are very similar in terms of rate, you need to read the fine print and see what other features are offered with these loans. When you do this, you may find some hidden costs that would make one offer seem less desirable than first imagined.

Beware of Hidden Costs

If you think you have found a loan with the best rates, look deeper. Are there any extra fees or misleading terms attached to this loan? Some lenders include arrangement fees and early repayment fees in their loan agreements. As for the latter, should you pay more than your minimum amount each month, chances are that you will pay back your loan early. Why would you want to be penalized for that? Even if you don't think your loan will be paid off early, you should avoid this repayment penalty, just in case.

In addition to hidden fees, you may find yourself duped by carefully worded terms in the agreement. For example, one bank may offer a very low APR that seems desirable, yet they want you to pay back the loan much faster than you had planned. Even with that low interest rate, the monthly payments would be very high, perhaps too high for you to manage. Try to conduct some research before comparing loans. While some information may be misleading because the lender is being a bit unscrupulous, it could also be due to your own ignorance.

If you really like one agreement, yet you find some questionable fees or jargon attached to it, try to negotiate with the lender. They may be more flexible than you think, particularly if you have good credit on your side. You should already know your credit score going into these negotiations but if you don't, you can obtain a free annual credit report from the government. Borrowing from the bank that you normally do business with may help your case when trying to amend the offer made to you.

Making the Final Decision

While it is a given that you should read the fine print, you may want to go one step further and consult a financial advisor before signing on the bottom line. Make sure this is an impartial third party that isn't affiliated with the financial institution you are borrowing from. In some cases, such as borrowing money in a foreign country or borrowing extreme amounts of money, you may want to also have a lawyer present. These are all safety precautions that will help to ensure you are entering a fair agreement.

How does one really get the "best rate" on a loan? It isn't all about the interest rate, as explained above. What it really boils down to is a fixed, low interest rate in addition to no hidden fees or penalties. Also, you need to pay back your loan in a timely manner. Try to avoid paying minimums and always borrow as little money as possible. Even if you qualify for more money than you need, don't feel tempted to take it. Do your homework and take your time in making a final decision with your loan. Once you feel you understand how the market works and what your loan really entails, then you will be prepared to finalize your agreement.