How to shop for a personal loan

9/10/2012 8:27 PM ET


If you want to keep a substantial debt off your credit card, a personal loan may be the answer. Here’s how to pick the right one.

A personal loan can be a great way to consolidate debt or tackle a home improvement project without having to pull out the plastic. Unlike credit cards, personal loans often offer fixed interest rates and fixed repayment periods — usually three to five years — which makes it easier to budget payments.

On the other hand, getting a personal loan can be frustrating, confusing and even downright dangerous in some cases. Here’s how to shop for a personal loan:

Empower yourself. You’ll be in a better position to find the right loan if you know where your credit stands. Get your credit reports and scores before you start shopping. (Do you know your credit score? Take MSN Money’s quiz for a free estimate.) And because each application can trigger an “inquiry” into your credit, which can in turn lower your scores a bit, you’ll want to avoid the shotgun approach when you start applying. Instead, find the loan you believe is the best fit, and apply there before you try elsewhere. Peer-to-peer lender, for example, requires a minimum credit score of 640, while Lending Club requires a FICO score of at least 660., for example, requires a minimum credit score of 640, while requires a FICO score of 660 or higher.

Compare apples to apples. Renaud Laplanche, the CEO and founder of LendingClub, suggests you “look at the annual percentage rate, which is the total cost of credit.” But if you are comparing a personal loan to a credit card, he says you also need to keep in mind that “with the credit card there may be additional fees that come along later and don’t get included into an APR. The total cost of credit cards may be higher.” At LendingClub, for example, fees are included in the APR.

Stay safe. At our website , we’ve heard from many consumers who applied for “quick cash” personal loans online, only to discover they had been sucked into a scam. Some were tricked into paying upfront fees to get loans that never materialized, while others discovered years later that the personal information they had given on their application was sold to scammers, who then harassed them.

Before applying for an online personal loan, check to make sure the website and company offering the loan are legitimate. Check with the Better Business Bureau, and search for online complaints. (Remember, many scammers change names frequently to avoid detection.) Avoid companies that promise loans regardless of your credit, as legitimate lenders will take your credit history into account. When you do apply, make sure you are submitting information only on a secure site (look for a lock in your browser) and for third-party verification services like VeriSign.

Choose the right loan. Personal loans may offer repayment terms of one to five years. The shorter repayment period may not always be the best one for you, though. If you are consolidating credit card debt, for example, and you’ve been making only minimum payments, a three-year loan could raise your monthly payment significantly. That’s fine if you can afford the payment, but if your budget is tight you may run up new balances on your credit cards and defeat the purpose of the loan. If you choose a loan with no prepayment penalty, you can always pay more if you have the cash to do so.