How to Choose the Best Loan

Senior couple reviewing documents.

If you have multiple loan options, shopping for the best and cheapest loan can be complicated, and there are many different factors you’ll have to consider. With different loan terms, time limits, and monthly payments, finding the best deal can take some work. Here are a few basic things to consider and analyze before choosing the perfect loan for you.

Short vs. Long-Term Loans

Compare the different loan terms, and when possible, choose the shortest loan term available to you. While a shorter loan term will likely increase your monthly payments, you will find yourself paying a lower amount of overall interest.

If for some reason, the shorter loan term comes with a higher percentage rate, then you may consider taking the longer-term loan but making larger payments, as long as there isn’t a prepayment penalty.

Interest Rates and Annual Percentage Rate (APR)

The interest rate and/or annual percentage rate (APR) is one of the most important factors to consider when determining which loan is best. For some loan types, comparing interest rates is appropriate, but the APR is a better number to review. The APR factors in fees, including points and origination fees, while the interest rate is just the basic interest charged.

For mortgages, lenders are required to tell you the APR, and comparing the APRs is a better way to accurately determine which loan will cost you more in the long run. However, for variable rate loans, there’s no easy way to compare interest rates. In most cases, the comparison comes down to whether you are comfortable with the variability in interest over the loan term, as well as the current monthly payment.

Beware of Balloon Payments in Short-Term Loans

Some loans have a loan term that is shorter than the amortization term. Those loans generally have a balloon payment due that is essentially the remaining money owed at the end of the loan term. If you are analyzing a loan with a balloon payment versus one that doesn’t, keep in mind that you will need to have that money available to pay when it becomes due, or you’ll need to refinance

Consider the Total Amount Owed

The total amount owned includes the original amount borrowed plus interest and fees. Try to choose the loan with the least amount of money owed over the entire term, if you can afford the monthly payments.

Balancing Low Monthly Payments with Long-Term Affordability

Finally, look at the monthly payments to see the amount you’ll need to pay each month. While some loans with variable interest rates or balloon payments may provide a lower monthly payment than other loans, make sure you are not getting in over your head. If you are stretching yourself financially with an interest-only payment or other type of low monthly payment loan, re-evaluate exactly what you can afford. In general, take the loan with the lowest interest rate/APR and loan term as long as you can afford the monthly payment.

Need help making ends meet? Nonprofit financial counseling from MMI is free, confidential, and available 24/7 online and over the phone. Let us help you make sense of your money situation.

Tagged in Loans

Jesse Campbell photo.

Jesse Campbell is the Content Manager at MMI, with over ten years of experience creating valuable educational materials that help families through everyday and extraordinary financial challenges.

  • Better Business Bureau A+ rating Better Business Bureau
    MMI is proud to have achieved an A+ rating from the Better Business Bureau (BBB), a nonprofit organization focused on promoting and improving marketplace trust. The BBB investigates charges of fraud against both consumers and businesses, sets standards for truthfulness in advertising, and evaluates the trustworthiness of businesses and charities, providing a score from A+ (highest) to F (lowest).
  • Financial Counseling Association of America Financial Counseling Association of America
    MMI is a proud member of the Financial Counseling Association of America (FCAA), a national association representing financial counseling companies that provide consumer credit counseling, housing counseling, student loan counseling, bankruptcy counseling, debt management, and various financial education services.
  • Trustpilot Trustpilot
    MMI is rated as “Excellent” (4.9/5) by reviewers on Trustpilot, a global, online consumer review platform dedicated to openness and transparency. Since 2007, Trustpilot has received over 116 million customer reviews for nearly 500,000 different websites and businesses. See what others are saying about the work we do.
  • Department of Housing and Urban Development - Equal Housing Opportunity Department of Housing and Urban Development
    MMI is certified by the U.S. Department of Housing and Urban Development (HUD) to provide consumer housing counseling. The mission of HUD is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD provides support services directly and through approved, local agencies like MMI.
  • Council on Accreditation Council On Accreditation
    MMI is proudly accredited by the Council on Accreditation (COA), an international, independent, nonprofit, human service accrediting organization. COA’s thorough, peer-reviewed accreditation process is designed to ensure that organizations like MMI are providing the highest standard of service and support for clients and employees alike.
  • National Foundation for Credit Counseling National Foundation for Credit Counseling
    MMI is a longstanding member of the National Foundation for Credit Counseling® (NFCC®), the nation’s largest nonprofit financial counseling organization. Founded in 1951, the NFCC’s mission is to promote financially responsible behavior and help member organizations like MMI deliver the highest-quality financial education and counseling services.