When you need money quickly, the loan with the smallest monthly payment may look like the best option. However, a lower payment does not always mean a less expensive loan. A longer repayment period can reduce each payment while increasing the total interest you pay.
Begin by comparing the annual percentage rate, commonly called the APR. Unlike the basic interest rate, the APR reflects the interest and certain loan fees, making it easier to compare offers with similar terms.
Next, check the amount you will actually receive. Some lenders deduct an origination fee before depositing the money. If you borrow $5,000 but a fee is removed first, you may receive less than $5,000 while still repaying the full loan balance.
Review the monthly payment, repayment period and total amount paid. Look for late-payment charges, documentation fees, optional credit insurance and prepayment penalties. The Consumer Financial Protection Bureau recommends reading the loan disclosure carefully and comparing multiple offers.
Before signing, ask yourself whether the payment would still be affordable after rent, groceries, utilities, insurance and transportation. A loan should solve a financial problem without creating a larger one.
