The biggest mistake to avoid when taking out a personal loan
Choosing the personal loan with the best interest rate can make a big difference, especially when times are tough. Here’s how to find your best match. (iStock)
In the past few months, the coronavirus pandemic has taken a heavy toll on many Americans’ finances, with roughly 42 million people forced to file unemployment claims. During these tough times, many of those individuals have found themselves turning to a personal loan to provide them with the funds that they need to get by until they receive their next paycheck.
If you’ve also thought about going this route, one of the biggest mistakes that you can make with your money is forgetting to shop around for the best rate on your loan. Thanks to tools like Credible, it’s easy to compare rates and lenders in order to make sure you’re getting the most bang for your buck.
However, if you need more proof as to why rate shopping matters, keep reading to see just how much you can save.
Why rate shopping makes a difference
Essentially, if you don’t take the time to shop around for the best loan rate, especially now during coronavirus when we’re seeing record interest rates, there’s a good chance that you’ll end up paying more than you need to for the privilege of borrowing money.
Put simply, personal loans come with a lot of flexibility in terms. For example, while personal loan amounts typically range from $1,000 to $50,000, it is possible to get a personal loan worth up to $100,000. To see what kind of rates you qualify for with your credit history, enter your desired loan amount into Credible's online marketplace and compare offers from lenders almost instantly.
CAN YOU GET A PERSONAL LOAN WITHOUT A CREDIT CHECK?
Interest rates can vary greatly, too. According to Experian, the rates on these loans can range from 6 percent to 36 percent. In general, those with the best credit scores are given the lowest rates because lenders see them as less of a risk.
That said, every personal loan rate is different. Each lender will decide on their own interest rate for you based on their perception of your creditworthiness. With that in mind, shopping around gives you a chance to find the lowest rate available to you.
The benefit of rate shopping: an example
Whether you’re shopping for a personal loan or student loan, you should always select the option with the lowest interest rate because it will save you money in the long run. Though a difference as small as one percentage point may seem negligible on paper, it can make a substantial difference in how much you pay over time. Consider the following comparison between two loans:
EVERYTHING YOU NEED TO KNOW ABOUT PERSONAL LOANS
Loan A: Loan A is worth $10,000. It has an interest rate of 10 percent and a five-year loan term. With this loan, your monthly payment would be $212.47 and you would pay a total of $12,748.23 over the five years, of which $2,748.23 would be interest paid.
Loan B: Like Loan A, Loan B is worth $10,000 and has a five-year loan term. However, Loan B has an 11 percent interest rate. In this case, you would pay $217.42 each month and $13,045.45 over the five years, which amounts to $3,045.45 paid in interest.
If you were given the choice between these two loans, Loan A would be the obvious choice because it would save you nearly $300 overall.
The difference between rate shopping and applying for multiple accounts
Sometimes people avoid shopping around for a loan -- even if it means sacrificing their opportunity for low rates -- because they’re worried that doing so will negatively impact their credit score. While it’s true that having too many hard inquiries on your credit report at one time can lower your score, shopping around for low-interest rates on a personal loan won’t necessarily have this effect.
For one thing, some lenders only need to do a soft credit inquiry to give you a ballpark interest rate on a personal loan. Soft inquiries don’t damage your score and the lender wouldn’t need to perform a hard credit inquiry until it was actually time to approve you for the loan.
HOW TO FIND THE BEST PERSONAL LOAN FOR YOUR NEEDS
Also, credit scoring models treat inquiries related to rate shopping differently. As long as multiple inquiries happen within the same period of time and are for the same purpose, they’ll be counted as a single shopping event.
Keep in mind that the acceptable time period for rate shopping will vary by scoring model. For instance, FICO’s scoring model allows for a 45-day rate shopping window while VantageScore’s window is only 14 days.
The bottom line
By now, it should be clear that rate shopping can have a substantial impact on how much interest you end up paying on a personal loan. With that in mind, if you’re ready to start shopping around for a personal loan, visit Credible to easily compare rates and lenders today.