Personal Loan Comparisons: What Should I Compare?

Everywhere you turn for advice on secured and unsecured loans, there is a common suggestion that all consultant will provide:

Compare different loan offers and quotes before selecting a particular lender to apply to. However, though it is advisable to compare loan offers not everybody knows how to compare them and what kind of information is needed to perform a thorough assessment.

Loan Characteristics and Interest Type

The first thing you need to compare is the type of loan and the characteristics. It makes no sense to compare a balloon loan with an unsecured personal loan or a payday loan as if they where the same. Each loan has distinctive features and you should take them into account in order to compare them efficiently.

For instance, payday loans do not usually show an interest rate, instead they advertise as a fee every hundred or thousand dollars. However, that fee can be explained as a rate and only then compared to other loan types.


One of the main issues with these differences is the interest type. Since there are both fixed rate personal loans and variable rate personal loans comparing them can really be difficult because you cannot know what the future interest rate will be. What most consultants do is to consider the rate to be one or two points higher so as to be prepared for variations and in the event that the loan rate remains the same or drops it would imply unexpected savings which is less dramatic than unexpected expenses that you have not budgeted.

The King of Comparison: The APR

The annual percentage rate is probably the most complete tool for comparing different loans. These figures must be used by all lenders due to legal regulations to help protect customers from deceiving advertisement. The APR does not only include the interest rate it also includes additional fees and charges that can help you get a wider and more comprehensive idea of what all the costs of your loan will be.

The interest rate is needed for comparison but what happens when you acquire discount points? The interest rate will drop if you purchase discount points but some lenders charge higher closing costs if you buy discount points. Therefore, the interest rate is not a good enough tool for comparing loans. Instead the annual percentage rate will provide you with a more accurate idea of what all the costs will be.

Loan Closing: Compare Final Charges

A good faith estimate will provide you with almost all you need to know about the costs of closing the deal with a lender. It includes administrative fees, appraisal, title search, insertion of the transaction details on public records, etc. All these fees and costs can really add up to your overall loan monthly payments or imply a higher down payment if you want to get rid of them right away. Therefore it is advisable to include them on your comparison. Also, there can be huge differences between one lender and another one in terms of origination fees and third party fees so the lack of pondering of these final charges can be dangerous if you really want to find a good deal.

Source:http://www.americanchronicle.com/articles/viewArticle.asp?articleID=48815