Evaluate your loan offer by comparing the APR, total cost, including fees, monthly payments, and loan terms. Ensure it aligns with your budget and financial goals, and check for any hidden charges.
It’s essential you know what to look for in a loan offer, especially when it comes to personal loans.
This step-by-step loan evaluation process brings together everything you need to consider when deciding if a loan is good for you—and not just the other way around.
The 5 most important factors to consider when evaluating your loan offer
While there are many loan options out there, you shouldn’t take the first offer you find. When you’re working through a loan evaluation, consider these five key factors:
1. Loan amount
The first and most important question is: how much money do you need, and can you afford a loan with that amount? Answering this starts with clearly describing the purpose of a loan.
For example, what expenses or business goals are you financing if you’re a small business owner? If you’re looking for a personal loan, specifically, how do you plan to use the money?
Next, understand that all loans have limits. Loan limits typically are a function of your income, your credit profile, and the value of any collateral being used, meaning you likely can’t (and shouldn’t) have a salary of $50,000 and expect to receive a loan for $1 million.
Look for a loan you can easily afford to repay and that fits within your budget. If the loan amount you’re offered (and can afford) doesn’t cover all of your needs, maybe a loan for a lower amount is a good first step.
2. Loan type
After you decide on the loan amount you need, evaluate what type of loan would make the most sense given your situation. While a personal loan can be used for anything from home repairs to paying medical bills or consolidating high interest credit card debt, you may want to apply jointly with a co-borrower (for example, if you’re working on repairing your credit report and your spouse has a higher credit score).
Or a consolidation loan that pays down your credit card balances for you directly could be the answer to helping you responsibly control how you use the loan proceeds.
3. Interest rate and APR
Interest is calculated as a percentage of your principal loan balance (and incorporated into your monthly payment amount) for the privilege of borrowing the lender’s money. The annual percentage rate (APR) represents the total, or true, cost of your loan, because it includes your interest rate plus any additional fees charged by your lender.
The interest rate you’re offered will vary depending on factors such as your creditworthiness, the size of the loan, and your lender, and can tack on thousands of dollars to your loan. So not only should you compare interest rates between two or more lenders, also compare how much money each lender is offering versus the loan’s APR.
4. Prepayment
Some loans include what’s known as a prepayment fee (or, penalty)—meaning it will cost you extra if you decide to pay your loan off early. Check for this (sometimes hidden) fee in your loan agreement. Better yet, understand what you’re agreeing to before accepting the loan offer. Once you’ve accepted a loan with a prepayment fee, this usually can’t be changed after the fact.
5. Terms
Making sure you understand—and can deal with—all the terms of your loan offer is essential to a good loan evaluation. The terms include the length of time you have to repay, whether or not you have a fixed or variable interest rate, and the collateral used (if any).