Types of Personal Loans Explained, and How to Compare Offers
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This page is the practical part: how to compare personal loan offers so you know what you'll really pay, plus the costly options to steer clear of. You can follow it without reading the first page.
How to compare offers, step by step
Know your number
Decide how much you actually need and what monthly payment fits your budget. Borrowing more than you need only adds cost.
Check your credit reports
Look for mistakes and dispute them before you shop. Your credit shapes the offers you'll see.
Prequalify where you can
Many lenders show estimated offers after a soft credit check, which doesn't affect your scores. A full application usually means a hard inquiry.
Line up offers with the same amount and term
Compare like with like. A three-year offer and a five-year offer can't be judged on the monthly payment alone.
Compare the APR
APR includes the interest rate plus certain fees, shown as a yearly rate. When the amount and term match, the lower APR is the cheaper loan.
Compare the total cost
Multiply the monthly payment by the number of payments, then add any fees not already included. That's what the loan really costs you.
Read the fine print
Check for origination fees, late fees and whether there's a penalty for paying the loan off early.
Confirm the lender is licensed
Your state's financial regulator can tell you whether a lender is licensed to lend where you live.
APR vs. total cost: a hypothetical example
Here's a made-up example to show why the monthly payment alone can mislead you. Imagine one person is offered two loans for the same amount, $5,000.
| Offer A (hypothetical) | Offer B (hypothetical) | |
|---|---|---|
| Term | 36 months | 60 months |
| Monthly payment | $170 | $120 |
| Total of payments | $6,120 | $7,200 |
| Cost beyond the $5,000 borrowed | $1,120 | $2,200 |
Offer B looks easier each month, but it costs $1,080 more over the life of the loan. Neither is automatically right, because a lower payment may be what keeps your budget working. The point is to decide with the total in front of you.
Costly options to avoid
Some loans are easy to get precisely because they're built around high fees. Two are worth knowing by name:
- Payday loans: small, short-term loans usually due in one lump sum on your next payday, often within two to four weeks. Expressed as an APR, their fees are far higher than those of a typical personal loan or credit card, and the lender may take payment straight from your bank account.
- Car title loans: short-term loans that use your car title as collateral. If you can't repay, you could lose the car you rely on to get to work.
The biggest danger is the cycle. If you can't repay on time, rolling the loan over or taking a new one to pay the old one adds fresh fees each time. If money is tight, ask your creditors about a payment plan, check whether a credit union offers a payday alternative loan, or talk to a nonprofit credit counselor first.
Common questions
Does checking loan offers hurt my credit?
Prequalifying usually uses a soft inquiry, which doesn't affect your scores. Submitting a full application usually triggers a hard inquiry, which can.
Is a lower monthly payment always better?
Not necessarily. A longer term usually lowers the monthly payment but increases the total you repay, so compare the total cost too.
Can I pay off a personal loan early?
Often, yes, but some loans charge a penalty for early payoff. Check the loan agreement before you sign.
What happens if I can't repay a payday loan?
Contact the lender and ask about a repayment plan. The CFPB notes that you can't be arrested for defaulting on a payday loan, and that a payday lender can garnish your wages only with a court order.
Thinking about applying? Our short three-question check helps you decide whether you're ready before you fill in any application.
Take the 3-question check before applying
For official information, the CFPB's payday loan page covers costs, your rights as a borrower and a guide to using APR to compare loans.