There are many benefits associated with taking out a personal loan. A personal loan provides you with an upfront lump sum of money, allowing you to make repayments over a fixed term – generally a period of one to five years. Interest rates with a personal loan are lower than you would pay with a credit card, and fixed payments make it easier for you to budget.
These are just a few of the many advantages; however, there are also several disadvantages to taking out a personal loan. If you want to escape many of the financial pitfalls that can easily trap you if you are not aware of them, keep reading to find out how to avoid the biggest personal loan mistakes.
Not checking your credit score:
This is one of the most common personal loan mistakes. Before you apply for a loan, check your credit score. If you have a low credit score, you are viewed as a high risk customer and your interest rate will be higher. Improve your score by making timely payments, or paying off some of your current debt.
Failing to check origination fees:
Some loans are more expensive than others. The rates between your bank, credit union and an independent loan company will all vary. An origination fee can range from one to six percent of the loan; this fee is deducted from the loan. If you apply for a $20,000 loan, you will receive it minus the origination fee, and you are expected to pay that back. So do your research before deciding on which company to take your loan out with.
Not speaking the truth:
Be honest about your income, some people exaggerate their income to get a higher loan. If a lender finds out that you have lied on your application, they will cancel your loan.
Not changing your spending habits:
If you take out a loan for consolidation purposes, you open the door to keep spending now that you have extra credit available. If you want to stay out of debt, you will need to change your spending habits.
Not asking about penalties:
Some loan companies apply a penalty to your account if you want to pay the loan off early. Before you sign a contract, make sure that you read the small print.
Now that you are aware of the personal loan mistakes to avoid, become a smart borrower and ensure that you implement them when you are taking out a loan.