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How to choose a personal loan

If you are reading this, it’s probably because you need a loan for one of two reasons: either you want to consolidate debt accrued over several loans (usually store accounts and credit cards) or you need money for a specific purchase or expense. This distinction is important because the purpose of a loan will determine what features and specifics will best suit your needs.

Take, for example, a loan intended to cover an unforeseen expense. In this case the loan only has to provide credit at what you consider to be an acceptable cost (interest rate and fees). But, a loan taken to consolidate debt, on the other hand, will only make sense if it makes your existing debt less costly or allows you to get out of debt. For this reason, debt consolidation loans need to be chosen more carefully and only after you’ve done some math. We actually have an article dedicated to this topic, and When to take out a debt consolidation loan, will tell you how to figure out whether a consolidation can help cut the cost of your debt.

In this article, however, we look at the other kind of personal loan, the kind taken to meet an expense. This type of loan can be divided further into two more types:

● Loans used to pay for unexpected expenses

● Loans used to pay for things that will further oneself

And these prompt another question: should you even be considering a loan in the first place? In our article When to take out a personal loan, We explain how people can asses the benefits and risks or a personal loan. But, in this article we assume that you’ve already decided to take out a loan, and that you now want to know how to choose the best one. Here, we look at five points to consider when choosing a personal loan.

Interest rate

The interest rate is probably the first thing you’re going to look at when choosing a loan. This figure, combined with the length of the repayment period will determine how much interest you pay over the lifetime of a loan. So, the questions is, how do you ensure the lowest possible interest rate?

It all comes down to your choice of lender and your risk profile. The higher the risk that you’ll default on a payment, the higher the interest rate you’ll pay. So, even though the interest rate for someone with a specific risk profile will vary between lenders, the best way to get a low interest rate is actually to improve your credit score. To learn more how you can raise your credit score, read our article How to improve your credit score.

Fees and charges

Every personal loan involves a monthly administration fee, but some fees are higher than others, and some loans are subject to hidden costs. For some lenders, it’s these charges that make them their money. They keep their interest rates low to attract customers and then charge large monthly fees to make a handsome profit - at your expense. When comparing loans, make sure to calculate the cost over a lifetime of a loan, including both the interest paid and the fees. And remember to ask your lender if there are any hidden costs.

Repayment period

A loan with a longer repayment period might seem more attractive as it makes your monthly payments smaller, but you should be aware that a loan paid over a longer term will incur both a greater amount of interest and more fees. Always look for a personal loan that you pay back in the shortest time possible. You’ll have to pay more every month, but you’ll save more in the long run. Figure out what kind of monthly repayment you can afford to make, and then use our loan calculator to determine how long it will take you to pay back a loan of a certain size.

Repayment flexibility

In addition to fees, interest rate, and repayment period, you’ll also want to look at the repayment flexibility of a loan. You want to have the ability to pay back a loan ahead of time if you have the cash, and a loan that locks you into a fixed repayment period denies you the ability to save on your loan even if you have the means. Also remember this: the only reason a lender will deny you the option to pay back a loan sooner is that they want to get as much money out of you as possible. Such tactics are illegal and say much about how these lenders see their customers.

Consequences for missing a payment

Also consider the consequences of missing a payment. You should never apply for a personal loan with the intention of paying late or defaulting, but situations do arise that make paying on time difficult or even impossible. If a strike affects your work and your salary, you should be able to approach your lender and arrange to have your loan restructured. When you know that you are going to miss a payment, don’t wait for the debit order to bounce. Call the help center or go into the branch to talk to the service center – which brings me to my next point.

Good customer service

The best loan services offer a helpline and allow you to easily make additional repayments online. At Old Mutual we take this one step further by encouraging customers to open an Old Mutual Money Account that they can then link to their loan plan. This bank account, brought to you in association with Bidvest Bank, allows you an even greater degree of control over your finances and is the perfect account with which to start an emergency fund – a tool that will ensure that you don’t have to rely on a loan for those rainy day mishaps.

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