Learning how to choose the right personal loan involves more than finding the lowest monthly payment. The APR, fees, repayment term, total borrowing cost, and lender terms can all affect how much you ultimately pay.
This guide explains seven important factors to consider when comparing personal loans so you can evaluate your options more carefully and make an informed borrowing decision.
New to personal loans? Visit our Personal Loans guide to learn more about how personal loans, APRs, fees, and repayment terms work.
1. Decide How Much You Really Need to Borrow
Start by identifying how much money you actually need. Borrowing more than necessary can increase your monthly payment and the total amount of interest you pay.
Before applying, consider the purpose of the loan and whether the expected monthly payment fits comfortably within your budget alongside your existing financial obligations.
2. Compare APR, Not Just the Interest Rate
The interest rate represents the cost of borrowing the principal, while the annual percentage rate (APR) can provide a broader measure of borrowing cost because it incorporates the interest rate and certain loan fees.
When comparing similar loan offers, reviewing the APR can help you understand their relative costs more clearly. Make sure you are comparing APR with APR, rather than comparing one lender’s APR with another lender’s advertised interest rate.
3. Check the Fees Carefully
Personal loans may include fees in addition to interest. Depending on the lender and loan, these may include origination fees, documentation fees, late-payment fees, or other charges.
Read the lender’s disclosures and loan agreement carefully so you understand which fees apply and how they affect the amount you receive and the total amount you may repay.
- Origination or processing fees
- Late-payment fees
- Other administrative or loan-related charges
- The amount you will actually receive
- The total amount you are expected to repay
4. Compare Repayment Terms
The repayment term is the period over which you repay the loan. A longer term can result in a lower monthly payment, but it may also increase the total interest you pay over the life of the loan.
A shorter term may result in larger monthly payments while potentially reducing the total borrowing cost. Consider both the monthly payment and the overall cost when comparing loan terms.
5. Make Sure the Monthly Payment Fits Your Budget
A loan may appear affordable when you focus only on the amount borrowed, but the monthly payment needs to work with your actual budget.
Review your income and regular expenses before accepting a loan. Leave room for essential expenses, existing debt payments, savings, and unexpected costs. A payment that stretches your budget too far can create financial pressure later.
6. Compare Multiple Lenders and Loan Offers
Loan terms can vary between lenders. Comparing multiple offers may help you identify differences in APR, fees, repayment periods, monthly payments, and other conditions.
Avoid choosing a loan solely because one advertisement highlights a low rate. Review the complete terms and disclosures associated with each offer before making a decision.
Next step: Learn how to compare APRs, fees, repayment terms, monthly payments, and total borrowing costs in our Personal Loan Offers Comparison Guide.
7. Check the Lender and Watch for Loan Scams
Be cautious of companies that promise guaranteed approval regardless of your credit history or ask you to pay money in advance in exchange for a guaranteed loan.
Before providing sensitive personal or financial information, verify that you are dealing with a legitimate lender and carefully review the company’s identity, contact information, disclosures, and loan terms.
Personal Loan Comparison Checklist
| What to Compare | Why It Matters |
|---|---|
| Loan Amount | Borrowing more can increase both your payment and total borrowing cost. |
| APR | Helps you compare borrowing costs while accounting for the interest rate and certain fees. |
| Fees | Origination and other charges can increase the overall cost of the loan. |
| Repayment Term | The loan length affects both monthly payments and total interest costs. |
| Monthly Payment | The payment should fit comfortably within your budget. |
| Total Repayment | Shows the broader financial impact of borrowing over the life of the loan. |
| Lender Terms | Eligibility requirements, payment policies, and other conditions may differ. |
Questions to Ask Before Accepting a Personal Loan
- What is the APR?
- Are there origination or other fees?
- How much money will I actually receive?
- What will my monthly payment be?
- How long will I be making payments?
- What is the total amount I may repay?
- What happens if I make a late payment?
- Are there any other important conditions in the loan agreement?
Looking for more practical financial information? Explore our Financial Guides for more resources on credit cards, personal loans, credit scores, and banking.
How to Choose the Right Personal Loan: Final Thoughts
The right personal loan depends on your financial situation, borrowing needs, and the terms available to you. Instead of focusing on a single number, compare the APR, fees, repayment term, monthly payment, total borrowing cost, and lender terms together.
Take time to review the disclosures and understand your repayment obligation before accepting a loan. Comparing multiple options can give you a clearer picture of which offer may better fit your circumstances.
Frequently Asked Questions
What should I compare when choosing a personal loan?
Compare the APR, interest rate, fees, repayment term, monthly payment, total repayment amount, and important lender terms. Looking at these factors together can provide a more complete picture of the cost of borrowing.
Is the lowest interest rate always the best personal loan?
Not necessarily. A loan with a low advertised interest rate may have fees or different repayment terms that affect its overall cost. Review the APR and other loan terms before comparing offers.
Is a longer personal loan term better?
A longer term may lower the monthly payment, but it can also increase the amount of interest paid over time. Consider both affordability and total borrowing cost.
Can personal loans have origination fees?
Yes. Some personal installment loans may include origination fees or other charges. Review the lender’s disclosures to understand the fees associated with a particular loan.
Should I compare more than one personal loan offer?
Comparing multiple offers can help you identify differences in APRs, fees, monthly payments, repayment terms, and other conditions before deciding which option fits your circumstances.
Sources & Further Reading
- Consumer Financial Protection Bureau — What is a personal installment loan?
- Consumer Financial Protection Bureau — Do personal installment loans have fees?
- Consumer Financial Protection Bureau — Interest rate vs. APR
- Federal Trade Commission — What to Know About Advance-Fee Loans