At a Glance
Depending on your individual financial situation, you may have determined that a personal loan is right for you. In this situation, it’s imperative that you look at the common mistakes people make when taking on this form of a loan. By doing so, you can avoid losing extra money to fees or by settling on a less-than-ideal offer.
In this article, learn more about:
Failing to Read the Fine Print
One of the biggest pitfalls people often stumble across in regard to personal loans is hidden fees. On the surface, a personal loan offer may seem like a great deal with a reasonable interest rate, but there may be hidden fees attached. Watch out for some of the following:
- Origination Fees: Some lenders will charge something known as a loan origination fee that is simply a set percentage against the principal of the loan. This fee is charged solely for the purpose of creating the loan. Some origination fees can reach as high as 10%, which on a $5,000 loan could be $500.
- Late Payment Fees: Many loans often have overdue payment fees which are a set percentage added to payments that are past due. While this is a standard fee, it is important to be sure that the fee you are charged is not exuberant.
- Prepayment Fees: While it may seem counterintuitive, some lenders will charge you a fee if you pay off your loan in full earlier than the agreed upon time. Sometimes, this fee is large enough that it may make or break your choice to take on the loan.
Not shopping around for offers
When evaluating personal loans, one of the biggest mistakes you can make is to settle for the first offer you receive. Primarily, check with the financial establishments you have history with for offers as they may provide more favorable rates. Do not stop there. Take the offers you have from your financial institutions and look into third-party lenders to see if you can get a better rate elsewhere.
Factors such as interest rate, monthly payments, and the repayment period can all change depending on specific lenders. Those who have good credit can receive interest rates well below 10%. There is no way to learn how to avoid interest on a personal loan, but you can certainly learn how to receive the best rate. If you have excellent credit but receive a high interest rate from a lender, keep looking to be sure you are getting a fair value.
Not considering length of repayment
One of the fastest ways to damage your credit score is to miss your repayments on a personal loan. Regardless of whether you are taking out a small loan or a large loan, you need to be certain that you have enough extra income per month to meet your repayments. Personal loans for first time borrowers can often be enticing because of the large amount you may be offered.
Having potentially thousands available to you immediately is so tempting that someone may jump on the offer without considering how long it will take to repay the loan. Monthly repayments can be large which is easy to ignore at first, but as time goes on it may become more difficult. Your income needs to be stable enough that you can make your repayments in full not just in the short-term, but in the long-term as well.
Related: 5 Subtle Tweaks to Pay Off Debt
Seeking a loan amount beyond what you need
One of the biggest personal loan mistakes is taking out more than you need on the loan. Many people often wonder if you can take out a personal loan for anything and, in most cases, the answer is yes. However, this is why the first step in the loan process should be evaluating the purpose for the loan you seek and calculating the exact amount you need to the specific cent. Never take out more than you need on a single loan as it can lead to significant extra debt.
Calculate the amount: Personal loan calculator
FAQs / Commonly asked questions about personal loans
Is taking out a personal loan bad for credit?
Many people often wonder does applying for a personal loan affect your credit, but the answer can vary. If you opt for pre-qualification for a loan that only involves a soft check on your credit score, it will not impact your credit. However, a full application for a personal loan often involves a hard pull on your credit score, which will have an impact on your credit. Keep in mind that there are several factors that go into your credit score, and the number of inquiries on your credit has a small impact comparatively. Missing a payment on a loan will have a far larger impact than applying for the loan, so be sure to make your payments in full and on time.
Related: Personal loans for bad credit
What disqualifies you from getting a personal loan?
Some common reasons you may be disqualified from a personal loan include a sub-standard credit score, insufficient income, and unverifiable employment. There are additional reasons your loan may be rejected, but these are among the most common.