5 Personal Loan Traps and Mishaps to Avoid
There are many ways to use a personal loan, ranging from debt consolidation to tackling a large home renovation project.
While there are several benefits of this type of loan, there are also a variety of traps and mishaps that could get in your way. Here are five to watch out for:
1. Biting Off More Than You Can Chew
As tempting as it may be to borrow as much money as you qualify for, you don’t want to make this mistake.
Instead, know what you need and stick to this number. You’ll be glad that you did when your first payment comes due and you begin to repay the money you owe.
The more you borrow the more you’ll pay in interest. Furthermore, if you bite off more than you can chew, there’s a greater chance you won’t be able to make the monthly payment in the future.
The majority of personal loans have a fixed interest rate, however, some lenders deal only with variable rate loans.
A variable rate personal loan isn’t necessarily a bad thing, but most consumers prefer a fixed rate. With this, you never have to worry about your payment changing from month to month. Subsequently, it’s much easier to budget for the future.
3. Origination Fees
It’s easy to pay so much attention to how much you’re borrowing, the interest rate, and the overall cost of the loan that you overlook any origination fees that may come into play.
This is something to discuss upfront, as no two lenders are the same.
Some lenders have no origination fee, while others charge a percentage of the loan value or a set amount.
As a general rule of thumb, a loan with no origination fee is typically more affordable (although there are other factors to consider, such as the rate).
4. Assuming Your Local Bank is Best
There’s nothing wrong with requesting more information from your local bank, especially since you’re familiar with the people, how they work, and the customer service they offer.
Even if you start here, it’s imperative to open your search to include a variety of lenders.
If time allows, contact three to five lenders to collect more information. This will go a long way in helping you make an informed and confident decision.
5. Terms and Conditions
Every personal loan has terms and conditions you must abide by. It’s important to understand these before you sign on the dotted line, as you don’t want to face a surprise in the future.
What happens if you miss a payment? What happens if you default on your loan? What types of fees and penalties could impact you in the future?
You should never agree to a personal loan until you fully understand the terms and conditions. If something doesn’t make sense, ask before moving forward.
These five personal loan traps and mishaps have the potential to stand between you and financial success.
Fortunately, when you keep these in mind, you’re in better position to avoid costly and time-consuming mistakes.