Personal Loans: What Are the Best Terms?

Personal loans can be tremendously helpful for families in many ways. Loans are available from many lenders and they seem to come with any number of term options. Those terms matter quite a bit. The longer you have the loan, the more you wind up paying in total, but the less you pay per month. Payment amounts hinge on interest rates. It begs the question – what are the best terms for a personal loan?

APR

When it comes to the interest rate of a personal loan, there isn’t much to discuss. The lower the APR, the less you are paying for the privilege of borrowing the money. Less in more, in this case. Choose the loan with the lowest APR that is available to you.

Be especially mindful of loans that don’t publish or tell you the interest rate as they may be predatory lenders with astronomical rates. The only other consideration for a low interest rate is to be sure that the interest rate isn’t low because the fees on the loan are very high. Ideally your personal loan will have low fees and a low APR.

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Loan Length

Personal loans come with two main factors to consider – APR and loan length. APR is simple. Lower is best. Loan length is a bit different to consider. Personal loans are available anywhere from 12 to 60 months in most cases. The terms you choose can make a big difference in how you are able to pay back the loan. Loan length is a consideration for a number of reasons.

Monthly payments – When you borrow money, the more payments you have, the less you have to pay back every month. So the longer the terms of your loan, 60 months versus 24 for example, the less you will have to pay out of pocket every month. The downside of this is that banks assume a higher risk when you pay back a loan more slowly, so they will charge you a higher interest rate. You will be paying less every month to borrow money, but you’ll be paying back more over the entire life of the loan.
Current finances – The loan length you select will likely be tied to your current budget. If you have limited funds at the moment or you are trying to reduce your bills by consolidating credit card balances, a longer loan and a smaller monthly payment will probably be beneficial, even if it means paying slightly more over the life of the loan.

On the other hand, if you have the funds to pay more every month, it may be worthwhile to do so. Not only will you be spending less every month in interest over the loan, but you will also be finished with all of the loan payments years earlier, freeing up significant funds in your budget for other financial goals.

The amount you borrow – The more you borrow, the larger the monthly payments will be. When applying for a personal loan, it is very tempting to get a bit more than you need to. That extra can be fun to spend, but it can come with its own significant side effects. By borrowing more than you need now, you may put yourself in a pinch down the road when you are left with very high payments for years. Borrow only what you need and what you can afford to pay back.
Special promotions – Lenders will offer special promotions from time to time on personal loans. It benefits you to check out those offers to see if there are any perks available for borrowing from one lender versus another or borrowing a certain amount or for a certain length of time. While a lender’s special offer should not weigh in your decision more heavily than your own financial considerations, if you can make a special promotion work for you, why wouldn’t you?
Future finances – Finally, before committing to a personal loan over a long period of time, consider your personal finances. Will you be receiving a large sum of money like a tax return or work bonus that might help you pay your loan back more quickly or allow you to reduce the amount you borrow? Do you know that your work is cyclical, and you’ll be bringing home less money in the future that would make your loan harder to pay back?

Check for things like prepayment penalties if you might be able to pay the loan off early. And check for specific terms that might lock you into a situation you can’t recover from down the road.

Everyone has a different situation, and what works for one person doesn’t necessarily work for another. When you are considering a personal loan, shop around to be sure you are getting the best terms for your unique situation.