After the holidays, many of us pause to take inventory of all the spending and where that puts us financially. Sometimes we find ourselves so overextended that we think maybe a consolidating loan to pay off high-interest credit cards and reduce the number of payments might be the way to go. But how do we go about it? Where do we go? What are the important factors to consider?
You need to first understand everything from the key reasons for raising a loan to the factors that you must consider before opting for a lender and the caution to exercise. Here are some key risks to consider:
- Interest rates: Personal loans generally come with high interest rates compared to secured loans, particularly if you have a low credit score.
- Origination fees: Some lenders charge fees to process the loan, adding to the overall cost and must be considered.
- Prepayment penalties: Some loans also charge prepayment penalties for paying off the loan early.
- Impact on credit score: Applying for a personal loan will impact your credit report and may lower your credit score.
- Debt burden: Taking on additional debt is yet one more financial obligation. If you’re struggling already this can make things worse, unless the loan payment is less than all the other monthly debt payments you were already making and are planning to pay off with the loan proceeds.
- More debt: Since you have reached this point, you need to consider your overall spending patterns lest you once again find yourself in a place where you’re financially stretched and need some relief.
Choosing a Lender
You will be quoted a range of interest rates, based upon your Fair Isaac Corporation (FICO) score. The lower the score the higher the rate. A FICO score above 740 is very good to excellent, while scores under 670 mean the higher interest rates or even that your loan application may be denied altogether.Here are some lender options:
- Non-banking financial corporation—Generally, you will pay a higher interest rate than what a bank would charge, but if you’ve been turned down by banks this may be your only resort. These are recommended:
- SoFi: Known for its low rates, no fees, and flexible payments. Ideal for borrowers with good to excellent credit. Best for good to excellent credit. Offers loans from $5,000 to $100,000 with annual percentage rates (APRs) ranging from 8.99 percent to 29.99 percent.
- LendingClub: Good for borrowers with fair to poor credit, offering loans with reasonable rates. Best for debt consolidation. Provides loans from $1,000 to $40,000 with APRs ranging from 8.91 percent to 35.99 percent.
- PenFed: Offers loans through credit unions with competitive rates and flexible terms. Offers loans from $600 to $50,000 with APRs ranging from 8.99 percent to 17.99 percent.
- Bank—Best to seek out the loan from your bank where you have been doing business a long time. Then check other banks to see if another may be offering a lower interest rate.
- Discover: Provides competitive rates and no origination fees, suitable for debt consolidation.
- LightStream: Offers loans with no fees and low rates, varying based on loan purpose. Great for home improvement loans. Best for low interest rates. Provides loans from $5,000 to $100,000 with APRs ranging from 6.94 percent to 25.29 percent.
- American Express personal loans are good for people with fair-to-excellent credit. The company offers large dollar amounts, low minimum APRs and no origination fee.
- Fintech—There are several popular lending apps in the United States that offer personal loans. Each app has its own features and fees, so it’s important to compare them based on your specific needs and financial situation.
- MoneyLion: Offers cash advances up to $500 with quick access to funds. Ideal for those needing immediate cash.
- Albert: Provides cash advances up to $250 without a credit check. Funds can be accessed instantly for a fee.
- Brigit: Allows borrowing up to $250 with no late fees or penalties. Funds can be accessed instantly for a fee.
- Chime: Offers advances up to $200 at the point of sale. Great for small, immediate expenses.
- Dave: Provides cash advances up to $500 with membership and express fees. Ideal for those needing larger advances.
Equated Monthly Installment (EMI) Calculator
This handy tool allows you to compare loans offered based upon entering the amount of the loans, interest rates, and length of the loan to provide you with your monthly payments.Here is an example: Let’s say you’ve decided you need a loan in the amount of $10,000 and the lender has quoted a 10 percent interest rate and three years to pay off the loan. Enter these three numbers in the EMI calculator and your monthly payment is $320.01.
(Source: EMI loan Calculator)
Terms
Be sure you look carefully at each of the terms as they relate to the loan—before you sign!- Interest rates: Banks will be lowest, but after you have looked at several (at least three) the lowest is of course the best. But make sure only the interest rate is going to be a loan charge, sometimes there are other fees (see #2 below) that then must be taken into consideration. According to Investopedia the average personal loan interest rate October was 26.1 percent—quite high indeed.
- Processing fee: This likely is not a large amount and generally deducted from the amount you’re borrowing; processing fees are part and parcel to the overall cost of the loan. Some EMI calculators will allow you to input these fees so you can analyze the loan in its entirety.
- Reputation: A new lender or one that is small and relatively unknown you should pass up to avoid taking risk. Check the reputation of the lender through online reviews, and if you are opting for a fintech lending app be extra careful.
- Get started: This link will get you started in your search. Another is Investopedia’s Top Personal Loan Lenders for 2024.
Summary
Financial planning is a tough and challenging navigation, especially when surprises and emergencies show up. This points up the importance of budgeting, a term most people don’t want to hear. Debt is a four-letter word and can turn into the worst sort of poverty if left unchecked.While some debt is unavoidable—almost always your home purchase—and most often your car as well, look at debt as another kind of mortgage, a mortgage that will burden your future earnings and reduce the amount you can save and spend.
Here is the best way to look at debt: While you are steadily increasing debt, year after year, you are essentially living beyond what you have earned. And when the time finally comes, and it will, to reduce your accumulated debt, you will be forced to live below what you are earning.
And a last word from the poet Ogden Nash: “Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.”
The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
