Factors to Consider When Getting a Personal Loan

 

Personal loans are simple to get as compared to business loans. Since they are divided into multiple categories thus the borrowers have a wide range of options to choose from. Just like all other loans, they are quite simple. You borrow the money and you pay it back over a period of time in form of fixed installments.

Seems simple enough right? Well, yes they are simple and that is exactly how they work. But in order to make the best out of them it is important to understand the mechanics behind them. There are certain factors of the loan that help you decide whether a loan would be best suited for your need or not. So let us look at important terms of loan that help you make the best decision possible.

· Interest

Every penny that you borrow comes at a price which in official terms is known as interest. The rate of interest depends on your credit score, credit history, the sum borrowed and the lender himself as well. The lower the interest rate, the better it is for you. So make sure to keep it to as minimum as possible.

· Monthly Payments

Loans are repaid over a fixed period of time in form of monthly payments. Your monthly payment consists of a portion of the principal amount, interest charged on the basis of the interest rate and other associated fees. In case of installment loans, the monthly payments are pre-defined and fixed by the lender. Whereas in case of credit card loans, a minimum payment amount is set which you have to make every month. You can also pay more depending on your income.

· Loan Length

Your loan period is determined by the length of your loan. It usually falls between months or years. It is a crucial aspect to consider as it affects the monthly payments and the total interest that you are charged over the course of your loan period. This means that the longer the loan length, the smaller the monthly payments. But at the same time, it also means that you will have to pay more interest on the borrowed amount.

· Down Payment

For most loans such as mortgage and auto loans, you have to pay a certain amount upfront as down payment in order to acquire the asset that you need. The good thing about down payment is that it reduces the amount that you need to borrow but at the same time it is also hard for individuals to get the required down payment. Most lenders ask for 20 – 30% of the total value of the asset as down payment but it can vary from asset to asset and lender to lender.

Final Words

Loans seem simple but are quite tricky. They work both ways as they benefit both the lender and the borrower at the same time. But if you look at it closely, lenders only have to consider the risk whereas the borrowers are the one under constant pressure to make timely payments to avoid legal action.

So, from a borrower’s perspective, it is very important to consider the above mentioned terms of the loan before you agree to anything. This is a decision that you want to get right so don’t rush into it or make sudden decisions as they might get you in trouble in the long run.