Understanding Personal Loans – How To Save More

A loan just for you

Personal loans are a great help when paying for vacations or home renovations. The key is to make sure you can afford to borrow, and then shop around to get the best deals on interest rates, fees, and charges.

• How personal loans work
• Check the interest rate, fees and charges
• Find out the term of the loan
• Read your credit contract
• Stay out of debt

How personal loans work

When you agree to take out a personal loan, you’ll repay the borrowed amount within a predetermined time frame- typically one to five years. You’ll also pay interest on the amount you borrow, plus standard fees and charges.

What you’ll need to give the creditor

All credit providers are required to lend responsibly. They must not lend any money that may be deemed unsuitable for you and your current financial circumstances.

Creditors may look at your credit report and also ask for:

• Pay stubs
• Bank account statements
• Copies of your current credit contracts or bills

They must verify that you can meet your payment schedule without falling into a hardship.

Secured and unsecured loans

Secured loans will usually offer lower interest rates compared with unsecured loans, but you’ll need to put up an asset like a car or home, as your “security” to obtain the loan. If you don’t repay the loan, the creditor may sell your asset to get its money back without having to go to court first.

Unsecured loans don’t require you to put up an asset as security, but the interest rate is typically higher. To obtain an unsecured loan, you must be able to convince the creditor that you have the ability to repay the loan. If you don’t repay, the creditor may take you to court to get its money back.

Check the interest rate, fees and charges

Personal loans usually have lower interest rates than credit cards, but they are still high compared to other types of credit. Fees may also be higher.

Annual percentage rate

The annual percentage rate (APR) is the interest rate your creditor will charge you to borrow money. It’s also known as the “listed” rate. Multiply the APR by the term of the loan to discover how much interest you will pay over the life of the loan.

Fees and Charges

Smart Tip: Even small variations in interest rates can add up a lot over time, so always shop around. Find out what charges you will be up for if you can’t make your payments.

There are a few different types of fees on personal loans to watch out for when evaluating creditors and their options:

• Late fees- the most common fees associated with a personal loan. These are the financial consequences of not paying your loan payment within its predetermined date.
• Early payoff fees- although counter intuitive, there are some creditor who will have a fee for paying your loan in full before the term of the loan ends. This is an attempt to cover the interest the creditor would have collected over the life of the loan.
• Origination fee- this may also be called an establishment fee, and varies from lender to lender. It’s the amount of money you will pay to have the banks to consider lending to you, as well as cover the costs of processing your loan.

Find out the term of the loan

A personal loan may sound great because of its lower interest rates, but the longer the term, the more interest you will pay. When you compare your loans and creditors, make sure you standardize those comparisons by choosing the same term-length for each loan. This will create a much clearer picture of what they have to offer you.

Read your credit contract

When you take out a personal loan, you’ll be asked to sign a credit contract. The contract will detail:

• The amount you borrowed
• The interest rate, fees, and charges
• The amount of payments and their due dates
• The term of the loan

Always evaluate the terms and conditions of your contract before you sign.

Stay out of debt

Try to pay off the loan quickly to reduce the amount of interest you’ll pay. Contact your creditor early if you have trouble with your payments or see trouble with debt for help and advice. Also see borrowing basics for more tips on managing credit and loans.

Evaluate the true cost of a personal loan before you sign up. Consider whether it is the most cost-effective credit choice for you. Know whom you’re dealing with, and act early if you find you can’t keep up with your payments.