Financial independence is a beautiful thing. You can buy any car you want any time you want. You can buy a new furnace when your old one gives up the fight, and you can do so with the "small change" you have on hand. Basically, money is not an issue for you. Sadly, the life of the financially independent is not the life that most of us lead. This means that when you need to make a big purchase, you will need to take out a loan to cover the cost. When it comes to choosing a loan, you need to know your options, so you can make a good choice.
Interest rates are not set in stone. Even though the federal reserve mandates what the minimum interest rate can be, banks can charge a higher interest rate for a loan based on several factors:
- The term of the loan. When you talk about the term of the loan, you are looking at how long you have to pay the loan back. The less time you have to pay the loan back, the higher your rate will be.
- Penalties. A bank will do a risk assessment to determine how likely you are to make your payments on time and to pay the loan back altogether. If your financial history suggests that you are a risk, they will charge a higher interest rate.
- The bank itself. Every bank will use different criteria to determine penalties. Thus, if you don't like what you are given at one bank, shop around to see if you can find a better rate.
Ideally, you always make your loan payments on time. Sometimes, however, life throws obstacles in your way. With this in mind, some banks will offer a grace period, meaning if you make your payment during a given amount of time, they won't penalize you for being late. While you should avoid taking advantage of this period, knowing that it is there can help you to avoid penalties that will make your payments higher as your credit score goes down.
Taking out a loan is a big financial commitment, so you should only take out a loan when you absolutely have to. The more loans you take out, the harder it becomes to make your payments and survive on the money you have left. Even if you only have one loan, you still need to make sure that you get the best deal you can. Taking the time to research your options is the best way to end up with a personal loan you can live with.