The good news is that you have several loan options. The bad news is that it’s not usually easy to find the best loan. In fact, the process can be downright complex, since there is a myriad of factors to consider, including monthly payments, time limits, and loan terms. So, you’ll need to put in some work to come up with the best and least-expensive loan. Keep reading for some fundamental things to think about and examine before choosing the right type of loan — for you.
Consider the Loan Term
Your loan term is the amount of time a lender gives you to pay back your loan. So, to the extent you can, pick the shortest loan term possible. Yes, a shorter loan term will probably mean higher monthly payments, but you’ll fork over less in overall interest.
Now, if the shorter loan term carries a higher percentage rate, you may want to think about accepting the longer-term loan but making bigger payments if there’s no prepayment penalty.
Consider the Interest Rate/Annual Percentage Rate
Among factors to consider when figuring out which loan is best, the interest rate and/or annual percentage rate (APR) is way up there, in terms of importance.
Note that for some kinds of loans, it makes sense to compare interest rates. However, the annual percentage rate is more appropriate to review, since it factors in origination fees and points and the like. By contrast, the interest rate is simply the basic interest charged.
Where mortgages are concerned, lenders must tell you the annual percentage rate. Sizing up APRs is the best way to figure out which loan, in the long run, will cost you more. The problem with variable rate loans is that there’s no simple way to compare interest rates. Likely, the comparison will boil down to whether you are okay with the interest variability over the long haul, in addition to the current monthly payment.
Consider the Balloon Payment
Some loans have an amortization term (the length of time it takes to repay a loan) that is longer than the loan term. Those loans will likely have a balloon payment so named because of its larger size due at the end of the loan term. The payment is basically the remaining money owed. If you’re considering a loan that has a balloon payment as opposed to one that does not, remember that you must have that cash on hand when it becomes due. Check out Achieve loans in this regard.
Consider the Total Amount Owed
This amount includes the original amount borrowed in addition to interest and fees. Go for the loan with the smallest amount owed over the whole term if you can handle the payments, that is.
Consider the Monthly Payment
The last thing you should consider is your monthly payment. Sure, some loans, including those with balloon payments or variable interest rates, may have a lower monthly payment than others. However, you must make sure you aren’t biting off more than you can chew. If you are over-extending yourself financially with an interest-only payment or another kind of low-monthly-payment loan, you should reassess precisely what is realistically doable. The general rule of thumb is that you should go with the loan that has the lowest interest rate or annual percentage rate and loan term. The proviso here is that you must be able to handle the monthly payment.
Ultimately, choosing the right type of loan means first considering a host of factors and variables including terms, interest rate or annual percentage rate, balloon payments, total amount owed, and your potential monthly payment. Also factor in your short- and long-term financial goals before signing off on a loan.
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