You have plenty of lenders and loan term choices when applying for a personal loan. As a borrower, especially if it’s your first time, you’d love to pick the perfect loan offer — a personal loan that will not answer your emergency expenses alone but with fair terms as well.

However, when someone is applying for a personal loan, the first question they’re asking the lender is, “How much is the interest rate? Is that the lowest interest rate you can offer?” While this is the primary factor to consider, this isn’t the critical factor alone. Here are a few other things you should consider before applying for a loan.

The Repayment Term Period

The repayment term is the next huge factor next to the interest rate. A lower interest rate reduces what you need to pay over time, and so does a loan with a shorter payment term.

Suppose you extend your repayment term for a longer time. In that case, a lower interest rate may end up costing more than a loan with a higher interest rate and shorter payment period. This is simply because you are paying the interest monthly. Below is an example:

Loan AmountMonthly Interest RatePayment TermsComputation
10,000 PHP2 %3 months10,000 ÷ 3 months = 3, 3,333.33   10,000 x 2% monthly interest = 200 PHP   3,333.33 + 200 = 3,533.33 PHP monthly payment   Total payment including interest = 10,600 PHP
10,0 00 PHP2 %12 months10,000 ÷ 12 months = 833.33   10,000 x 2% monthly interest = 200 PHP   833.33 + 200 = 1,033.33 PHP monthly payment   Total payment including the interest = 12, 399.96 PHP

While paying at a longer period would be so much lower than with a shorter period of time, you also need to consider which payment option makes sense. Below are a few factors you can consider:

  • The purpose of your loan — is it for an emergency, for travel, your kids’ tuition fees
  • Your salary — assess which option your income can afford
  • If you’re planning to start a small business, you can consider longer payment terms as long as your projected business income is higher
  • If you’re planning to improve your credit score, you can choose the shorter payment term

Are There Any Upfront Fees?

Upfront fees, commonly called processing, administrative, or underwriting fees, are one-off expenses your lender may charge upon taking out a loan. This fee covers the administration, management cost, and conducting your financial profile. The typical fee ranges from 1% to 10% depending on your loan amount, income, or if you have a co-signer and repayment terms.

Many lenders do not have an upfront fee, but you should need to consider this in computing the total loan cost. If your lender offers a low interest rate but has a higher upfront fee, then you should think twice.

Note that some lenders deduct upfront fees from your loan proceeds.

Are there Any Prepayment Penalties?

While paying off your personal loan early may sound great, did you know that a lender may also charge you for doing this? This may sound surprising, but yes, it is true, and it’s happening.

A prepayment penalty is a fee some lenders charge if you decide to pay your personal loan earlier than your due date. Lenders make money from the loan interest you pay. So, if you pay it off earlier, you’ll end up paying lesser interest than expected, which is a breach of the agreement. Because of that, they’ll make up the loss by charging you a prepayment penalty.

Other lenders do not charge a prepayment penalty, so you should ask this before signing your loan application.

Can You Qualify for the Loan?

Lastly, you need to assess if you can qualify for the loan. It would always make sense to check this out first so you’ll have a higher chance of getting approved. It will not only save your time but will make your loan processing faster especially if you already need the money.

Lenders cater to different kinds of borrowers. Check the lender’s qualifying requirement and see if they are looking for borrowers like you.

Are You Ready to Take a Personal Loan?

Always remember that the loan interest may be the greatest factor in applying for a personal loan but it is not the only thing to consider. Be cautious, especially if it’s your first time applying for a loan.

Ask your lender regarding the fees or other things that aren’t clear to you before signing the terms. In this case, you are a hundred percent sure that you’re making the right decision.

Ready to take a personal loan? Contact us to learn more.

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