Too Many Personal Loan Borrowers Skip This Money-Saving Step

One in six borrowers said they didn't compare multiple offers the last time they considered taking out a personal loan, according to a new survey from Experian.

That could end up being an expensive shortcut. Depending on the loan and the borrower's credit, shopping around could save you hundreds of dollars in interest.

Still, it's easy to see why borrowers might take the first acceptable offer — especially when they need the funds quickly. If you've already been approved and the monthly payment fits your budget, you may be ready to take the money and move on.

Christina Roman, consumer education and advocacy senior manager at Experian, says borrowers may be more focused on solving the financial problem in front of them than on taking the time to compare their options.

"Whether they're consolidating debt, covering an unexpected expense or funding a major purchase, it can be tempting to accept the first offer that seems good enough and move on," Roman says.

Sometimes "good enough" works out. Other times, settling for the first offer can cost you hundreds of dollars — and, in some cases, more than a thousand.

Shopping around for a personal loan could save you hundreds

It’s easy to see two loan offers with slightly different rates and assume the difference won't amount to much. But when you’re borrowing thousands of dollars, even a couple of percentage points can add up.

Take a $15,000 personal loan that you pay back over three years. In one example from Experian’s analysis, a borrower with a good FICO score — generally, between 670 and 739 — gets one offer with an 11.77% annual percentage rate, or APR. That works out to monthly payments of $497 and $2,876 in total interest over the life of the loan.

Another offer comes with a 14.27% APR. The monthly payment is only $18 higher, at $515, but the borrower would pay $3,527 in interest by the time the loan is paid off.

The two offers are 2.5 percentage points apart — but that relatively small gap translates to $651 more in interest over three years.

Your credit score can also affect the rates you're offered. Lenders generally consider borrowers with stronger credit histories to be less risky, which can help them qualify for lower rates. But lenders may weigh your credit history and other financial information differently, so the rate you receive can vary from one lender to another.

That's another reason to compare multiple lenders. Even if two lenders are looking at the same borrower, they may not offer the same rate or terms.

You don’t have to find a dramatically cheaper loan for comparison shopping to pay off. Experian compared the lowest APR it saw for borrowers in each credit tier with the median, or middle, APR. On a 36-month loan, choosing the lowest APR saved borrowers between $80 and $295, depending on the borrowers’ credit tier. Over 60 months, the potential savings ranged from about $115 to $452.

In other words, even if the first offer you receive seems reasonable, it may still be worth seeing what your other options are. A better offer could save you hundreds of dollars over the life of the loan.

How to shop around for a personal loan

You don’t need to become a personal loan expert to compare options. But you do need to understand the key costs and terms of each offer, including the APR, monthly payment and total cost of borrowing.

So where should you start? Let's walk through what to look for — and how to compare your options once you have them in front of you.

Gather a few options

You can shop for a personal loan through a marketplace that lets you compare options from multiple lenders in one place, or check offers directly from banks and credit unions. Depending on the site or lender, you may be able to see your estimated rate before formally applying, which can help you compare your options without immediately committing to a loan.

The goal isn't to collect a bunch of loan offers, but to have a few options to compare side by side so you can see how their rates, terms and costs differ.

Start with the APR

Once you have a few offers in front of you, start with the APR rather than the interest rate alone. The APR factors in the interest rate plus certain lender fees, such as origination fees, giving you a better sense of the cost of borrowing.

That distinction matters because two loans can have similar interest rates but different fees. The loan with the lower interest rate isn’t necessarily the cheaper option once those costs are factored in.

And don’t assume the lowest rate you see advertised is the rate you’ll get. Lenders determine your actual rate based on factors such as your credit history and debt-to-income ratio. Prequalifying with multiple lenders can give you a better idea of what you may actually qualify for before formally applying.

Pay attention to how the lender checks your credit when you prequalify. Prequalification often involves a soft credit inquiry, which doesn't affect your credit standing, while formally applying for a loan typically results in a hard inquiry, which can temporarily ding your credit score.

But that's just one step in the process. Matt Tomko, chief revenue officer at Happy Money, a consumer finance company that focuses on helping consumers pay down credit card debt, says borrowers should look beyond the advertised rate and monthly payment when comparing personal loans.

“The advertised starting rate and the monthly payment are helpful places to begin, but they don’t tell you what your actual costs will be over the life of the loan,” Tomko says.

Another important thing to note is that personal loans are fixed-rate installment loans, meaning you make regular payments over a set period and the interest rate stays the same throughout the life of the loan.

Understand the fees

Even after comparing APRs, it's worth taking a closer look at the loan’s fees. Some fees are reflected in the APR, while others may apply depending on the lender or how well you manage the loan. For example, late fees may apply if you miss a payment.

An origination fee is one of the highest costs to watch for. It’s typically a percentage of the amount you borrow and may be deducted from your initial loan amount. So if you need $10,000 and the lender charges a 5% origination fee, you could receive just $9,500. These fees typically range anywhere from 1% to 10% of the loan amount.

Some lenders may also charge application fees, although this is uncommon. Check the lender’s disclosures so you understand which charges could apply and when.

No matter what, borrowers should look for transparency around the costs of the loan.

“Are all costs clearly disclosed?” Tomko asks. “The best personal loan for your situation might not be the lowest advertised rate, but the one with transparent terms, manageable payments and a clear path to meeting your financial goals.”

Compare loan terms and total costs

The loan term is how long you have to repay the loan. A longer loan term can generally mean a lower monthly payment, but you’ll typically pay more interest overall.

When comparing options, use the same loan amount and repayment period in any loan payment calculator or lender comparison tool. For example, if you're considering a $15,000 loan that you'd repay over three years, enter a loan amount of $15,000 and a 36-month term, then plug in each lender's APR to see how the monthly payment, total interest and total cost compare.

And don’t let the lowest monthly payment decide for you. The monthly payment needs to fit in your budget, because getting in over your head could result in more debt than you started with. But keep in mind that a lower monthly payment can also mean you're paying off the loan over a longer period of time and spending more on interest.

This is where a personal loan calculator comes in handy.

“While a lower payment can provide important budget and cash flow flexibility, it may also extend the repayment period and increase the total cost of borrowing,” Tomko says.

Tomko suggests asking yourself: “Does the payment fit comfortably within your budget, and does it help pay down debt at a meaningful pace?”

Give yourself time to shop around

It can be tempting to take the first acceptable offer, especially when you’re already stressed about whatever expense prompted you to borrow in the first place.

Tomko says that’s one reason folks may skip comparison shopping. “The first acceptable offer can feel like the fastest solution, especially when they’re under financial stress and looking for relief,” he says. “But taking the time to compare options can result in real money back in your pocket.”

His advice is simple: “Spend a little extra time looking at your budget and comparing rates, terms and total costs. Even a modest reduction in interest can translate into meaningful savings and a faster path to financial stability.”