Finding the right personal loan involves comparing the rates and terms offered by different lenders, and a personal loan calculator can help. Just plugging a few details into a loan calculator lets you see how much your monthly payments will be and the total amount you will be paying in interest by the time you have paid off the loan in full. Before looking for a loan, let’s quickly explain how personal loans work and the fees you can expect to pay.
What is a personal loan?
A personal loan is an amount of money that you borrow from a bank, credit union, online lender, or other lending institution. Before committing to the loan, a lender performs a gentle credit check to estimate how much you can afford and whether you are likely to repay the loan as promised. This gentle check does not affect your credit score, and lenders make their decision based on your credit history to pay for things like:
Once a lender performs a soft credit check, they will give you an answer as to whether you are likely to qualify for a loan. If the answer is yes, it will also tell you how much your annual interest rate will be. Since loan shopping poses no risk to your credit score, it is advisable to collect loan offers from at least three lenders, although there is no harm in checking with one more. large number.
It is only when you decide to go with a particular lender that they perform a credit check. A thorough credit check dives a little deeper into your credit history and changes your credit score a bit (usually no more than a few points). Fortunately, your credit score rebounds when you make regular monthly payments.
The advantage of a loan calculator is that it allows you to do the math and compare things like annual percentage rate, total interest, and monthly loan payment.
As mentioned, a personal loan is usually distributed in a lump sum. In addition to the loan, you may be given an amortization schedule. You have to make monthly payments for the life of the loan until it is fully paid off.
Secured and unsecured personal loans
An unsecured personal loan is money borrowed based on your credit score. A secured loan, on the other hand, requires that you put something of value as collateral. The interest rate on a personal loan on a secured loan tends to be lower because the lender knows that if you miss payments, they can take possession of anything you put as collateral (like a car or a house), sell it and recoup its loss.
The advantage of secured personal loans is the lower interest rate, which makes it easier for you to pay off the loan. The downside is that the lender has the legal right to repossess anything you have put up as collateral if you default on payments.
How can I use a personal loan?
Once you are approved for a personal loan, most lenders don’t care how you spend the money. You can decide to use it for:
However, there are lenders who specialize in specific types of loans, and your loan proceeds must be used in a certain way. For example, some lenders offer a debt consolidation loan that can only be used to consolidate debt.
How high should my credit score be?
If you are ready to take out a personal loan, it is natural to wonder if your credit score is high enough. The truth is that there are personal loans for a wide range of credit scores. Unless you have very bad credit, there’s a good chance that a lender somewhere is willing to work with you. The catch is that personal loans for borrowers with poor credit usually carry a higher interest rate and loan fees.
As it stands, borrowers with the highest credit scores tend to get loans with low interest rates and low fees. No matter your credit score, here is a list of fees to watch out for.
When you submit your application, before getting a decision, you may need to pay an application fee of $ 25 to $ 50. Lenders say they charge an application fee to cover the administrative costs of processing your application. This includes obtaining a copy of your credit report and reviewing the details of your application.
Not all lenders charge an application fee, so be sure to look for one that doesn’t charge one. Again, the higher your credit score, the better your chances of being allowed to ignore application fees.
This is because lenders understand that they are competing for borrowers with strong credit, and they don’t want to discourage you from applying.
A common loan expense – especially among those with lower credit scores – is an origination fee. Origination fees can range from 1% to 8% of the amount borrowed.
Let’s say you take out a loan of $ 10,000 with a 4% origination fee. This means that the fee will be $ 400. Typically, the setup fee is deducted from the loan proceeds before that proceeds are deposited into your checking account. So instead of receiving the full $ 10,000, you would receive $ 9,600. And even if you haven’t received the full $ 10,000, you still have to pay it off like it’s part of your product.
Some lenders have chosen to waive the origination fees to attract borrowers with strong credit scores. Regardless of your credit score, look for a lender who doesn’t charge these fees. After all, there is no reason to pay interest on money you never received.
Penalty for early repayment
Of all the fees charged by lenders, a prepayment penalty is probably the least common. If you happen to have to pay a prepayment penalty, that means you have to pay fees if you pay off a loan faster than expected. In other words, if you pay off a five-year loan in three years, the lender will ask you to pay a prepayment penalty.
The reason for a prepayment penalty is that the lender expects to earn a certain amount of money from the interest paid. When you prepay a personal loan, the lender earns less interest. To try to compensate for this lost interest, he adds a prepayment penalty.
As mentioned, the prepayment penalty is one of the less common fees charged by lenders (and is sometimes referred to as an “exit fee”). It should be pretty easy for you to find a lender who doesn’t penalize you for prepayment.
Insufficient check fee
Most lenders will charge a check return fee if you make a monthly payment and your bank account does not have enough to cover the payment. The amount of the check return fee varies by lender, but is generally between $ 25 and $ 50. The problem is that insufficient check charges are frequently deducted from your account before you even realize your loan payment has not been settled. If your bank account tends to go down, the surprise deduction could result in the reimbursement of other insufficient funds payments. Also, unless you have overdraft protection, your bank may charge overdraft fees.
One way to avoid insufficient check fees is to sign up for automatic payment. Autopay allows the lender to deduct the loan amount from your bank account. Because it’s deducted on the same day every month, it’s easy to budget and you don’t have to worry about forgetting to send a payment. Plus, you are likely to get a small discount on your interest rate when you sign up for automatic payment.
Late payment fees
If your payment is late, a lender may charge a late fee. Depending on the lender, the fees can be fixed, typically between $ 20 and $ 50, or based on a percentage of your loan amount. The percentage based fees vary by lender, but are generally 4% to 5% of the amount of the missed payment. Let’s say your monthly loan payment is $ 400 and a lender charges a 4% late fee. This means that you will own an additional $ 16.
Again, by signing up for automatic payment and making sure that your account is sufficient to cover the loan amount on the same day each month, you will avoid late payments.
Once you’ve shoped around for your loan and have loan deals to compare, sit down with your favorite drink and use the loan calculator to help you determine which loan is best for you and your unique financial situation.