Understanding The Key Elements Of Personal Loans
There are many times when a personal loan may be the best choice for your financial decision. Personal loans are used for a variety of purposes like debt consolidation, large purchases, and home renovation. However, there are many important factors you should consider before deciding if a personal loan is right for you. Some factors include APR, prepayment penalties, fixed or variable rates, and interest rate.
What Is APR?
The APR stands for annual percentage rate. It provides an in-depth view of the total costs of your loan that includes various other fees associated with it. It is an excellent way to compare the total costs of your loan compared to other options.
However, keep in mind the APR does not reflect fees like late fees and prepayment penalties. These fees are not considered part of the charges that factor into your APR rate. Examples of fees that are sometimes included are loan origination fees, funding charges, and account verification fees.
Understanding Prepayment Penalties
Some loans have prepayment penalties. These fees are charged when you pay your loan off before your contractually agreed upon date. It is important to pay attention to your agreement to determine if it has such a clause in it. Prepayment penalties can negate the savings you would normally achieve by paying off a loan in advance.
Fixed & Variable Rates
Rates are discussed in one of two ways, fixed and variable. The difference between the two can cause quite a difference in your total payments on your loan. It is important to understand the key difference between the two.
Fixed rates stay the same throughout the life of your loan. They provide peace of mind in knowing that your payment amount will not fluctuate and make it much easier to plan your payments in the future. However, variable rates do have some benefits to them
Variable rates are tied to an underlying benchmark or index and fluctuate with time. (Source) While this may seem counterproductive, you can take advantage of significant cost savings during periods where the benchmarks are low in price. However, it is important to be prepared for potential future price increases. This is why many consumers go with fixed rates instead.
What About Interest Rate?
Your interest rate is the base rate that is charged on the proceeds of your loan. This number is independent of your APR and will often be different. This is because your APR factors in the total costs associated with procuring your loan while the interest rate does not. The interest rate still serves as a great way to get a rough approximation of the rates offered by loan providers and is most commonly seen in advertisements.
A personal loan is a great solution for a variety of financial situations. However, it is important to understand the key terms associated with your loan to make an informed decision. Pay careful attention to factors like your APR, prepayment penalties, and rate calculation. By understanding these important elements, you can be sure you are making the best decision possible for your unique financial situation.