How to Compare Loan Terms: 5 Valuable Tips to Know
April 22, 2016 Francine Jones 0 Comments
Unfortunately, shopping for a loan isn’t always easy. Simply comparing loans and determining what the cheapest option is can sometimes be very difficult. Choosing the right kind of loan is very important. According to Bankrate, defaulting on a loan is one sure fire way to destroy your credit score. With that in mind, below are five tips for comparing loan terms.
1. Compare by Years
One way to compare loan terms is in years. This should always be a very important part of your decision. If you choose a longer term, you will be paying off the loan for a long time with smaller payments. If you choose a shorter term loan, you will be paying off the loan quicker with larger payments. In most cases, it may be a better idea to choose a shorter term loan unless it comes with a higher percentage rate.
2. Compare by Interest Rate
A second thing you should examine when comparing loan terms is the interest rate. This is what the lender charges for borrowing money. It is an expense that must be paid in addition to the payments made to lower the loan balance. Always try to obtain lower interest rates. You also need to know what kind of interest rate is being offered. A fixed interest rate will stay the same until the loan is paid off. A variable interest rate will change.
3. Compare by APR
The second thing you should be looking at is the APR. APR stands for annual percentage rate. This represents the amount of interest you pay on the loan in a year. This should be one of the most important data points you compare loans by. Unlike just comparing loan interest rates, the APR will also include other expenses.According to the Consumer Finance Protection Bureau, the APR includes interest, fees, points and other charges. It can give a fuller picture of what a loan will cost.
4. Compare by Total Amount
You should also do a comparison by total amount owed on different loan terms. The total amount will include paying back the full amount that was borrowed, making interest payments and paying any additional fees. Figure out what the total amount owed would be for different loan terms to make the right decision. Just remember that the total amount owed being lower does not mean you’ll be able to afford the monthly payments.
5. Compare by Monthly Payment
Lastly, you should compare different loan terms by the monthly payment. Monthly payments can differ based on factors like variable interest rates and balloon payments made at the end of the loan. Just make sure you’ll be able to afford the monthly payment at all points during the loan before you agree to it.