Personal loans can be a cost-effective way of accessing credit – and they can certainly be cheaper than credit cards. However, if you are looking to economize, you should recognize that there are actually several ways to save money on a personal loan. The more cost you can squeeze out of the loan itself, the more money you can put towards meeting your needs.
6 Ways to Save Money on a Personal Loan
According to the U.S. Federal Reserve, the average interest rate on a personal loan these days is about 10 percent, or roughly 3.5 percent less than the interest on the average credit card balance. However, the cost of a personal loan can vary greatly, depending on the nature and the structure of the loan, and on your financial circumstances. You can use these cost differences to your advantage by actively seeking the lowest-cost options available. There are a variety of ways to do this – specifically, here are six ways to save money on a personal loan:
Spruce up your credit rating
The first thing you should do if you are considering a personal loan is to check your credit history. Your credit score will go a long way in determining the interest rate you get on a personal loan, and ultimately whether you can be approved for a loan. A quick check of your credit history should tell you whether there are any mistakes on your record, or any simple problems that you can easily clear up. Making sure your credit report looks as good as it can may take some lead time, so it is wise to address this early on, before you even start seriously shopping for a loan.
Use collateral if you can
Personal loans can be secured or unsecured, depending on whether or not you put up some collateral as security on the loan. If you have a suitable asset to use as collateral – perhaps a car, a boat, or even something like jewelry – you should consider opting for a secured loan. Lenders use interest rates as a way of covering their risks, so the less risky you can make the loan, the cheaper it is likely to be. Of course, this means putting your collateral on the line, but in any case you should not be borrowing unless you have budgeted carefully enough to be confident in your ability to repay.
Shorten the term
Again, interest rates are in part a reflection of risk, and shorter loans are considered less risky than longer ones. There is a trade-off here: a shorter term is likely to cost you less over the life of the loan, but it means meeting a steeper monthly payment. Run some scenarios on a loan calculator to see how short a term your budget can afford.
Once you have determined your credit rating, decided about putting up collateral, and calculated how short a loan term you can afford, you will have the information you need to start having substantive conversations with lenders about the cost of a loan. Try to narrow down your search by gathering some information without actually applying for a loan, since the application process can be time consuming and costly, and might even affect your credit standing.
Consider peer-to-peer lending
Besides traditional lenders, consider peer-to-peer lending websites to see if you can get a good deal. With interest rates generally low these days, investors are hungry for ways of earning a little extra on their money, and this has made capital available through peer-to-peer lending programs.
Watch out for the origination fee
While much of loan shopping focuses on the interest rate you will pay, don't overlook the size of the origination fee. You need to account for all such costs before making a comparison to see which loan terms are actually the most favorable overall.
Working to get better loan terms can be a very worthwhile exercise – after all, it is a process you only have to go through once, after which the results can pay off over a period of years as you repay the loan. Putting in the effort to save money on a personal loan means getting to hold onto more of your money in the long run.