Shopping for a personal loan isn’t always an easy task, and many people are advised to look for the cheapest personal loan possible. This may be good advice for some people. Yet it is only one of the factors that should be considered when looking for loans.
The cheapest personal loan could come from a family member or close friend. It might have low interest or no interest at all, no loan origination fees, and flexible repayment. People should always consider the hidden social/emotional costs of this form of loan. Some of the things to take into account include the following:
- What happens to relationships if the loan can’t be repaid?
- Does the loan make the lender feel entitled to comment on personal actions of the borrower?
- Are there certain expectations associated with the loan, such as favors, chores, obligations that will have to be met to keep the lender happy?
- Does a complicated emotional past with the lender create uncomfortable feelings in borrowing the money?
It is very clear from these questions that the cheapest personal loan from family or friends may not always be a good idea. When there exists a good relationship between lender/borrower, it still may be a wise idea to discuss some of these issues prior to a loan transaction. Creating a contract for repayment could be useful, too.
On the open market, perhaps the cheapest personal loan is most attractive. Yet what is meant by cheapest? Low interest rate is one definition of low cost, but others could include expected fees for late payments or early repayment, and fees to originate the loan.
Length of loan needs to be compared against interest rate because longer loans may mean paying more money. Sometimes a shorter loan with higher interest still costs less overall than a longer loan with low interest. Determining what is really the cheapest personal loan makes good sense.
This issue brings up an important point. Loan payments have to be affordable. If the cost of payments is too high, people might quickly default on loans. Sometimes it’s better to pay more money over a longer period of time than risk defaulting, in which case, the cheapest personal loan is not the best option.
Another area of consideration is whether to obtain a secured or unsecured loan. Typically the cheapest personal loan from bankers or other lenders is secured. This means some type of property is used to guarantee repayment, and if repayment doesn’t occur that property can be seized. While offering collateral makes sense to many borrowers, some people would rather pay additional interest to protect their property from seizure. With an unsecured loan, should inability to pay occur, the lender would have no right to homes, cars, et cetera from the borrower.
It’s quite evident that the cheapest personal loan doesn’t always make the best sense. There are a wide variety of considerations surrounding the topic of borrowing money. What does seem prudent is evaluating each of these to determine what path and what loan is the best.