Personal Loan Mistakes That Could Eat Up Your Money
When you want to consolidate a high-interest credit card debt, fund a once in a lifetime vacation, or improve the structure and aesthetics of your home, taking out a personal loan can be an attractive option. But similar to other forms of debt, personal loans accrue interest over time. They’d work for you if you take your loan application seriously, read the fine print, and investigate all your options before you make a deal with a lender.
Personal loans sure aren’t cheap. But what can be more frustrating is you can make your loan even more expensive by committing simple mistakes. From overlooking the little details to failing to change your money habits, here are some personal loan mistakes you cannot afford to make.
1. You overlook your options
Taking out a personal loan itself might be the mistake.
Keep in mind that all loans carry interest so before you sign the legalese, you should ask yourself: Do you really need to take out a loan today? Can you afford the fixed monthly payments associated with it? Lastly, do you have other zero-interest options?
For example, if you’re going to use the loan to consolidate a debt, you may consider opening a new credit card with a 0% introductory offer and transfer the balance of your other card to it. The downside, however, is it would harm your credit score in a way using a personal loan wouldn’t.
Explore your options and weigh their pros and cons before you say yes to your personal loan provider.
2. You don’t shop around
You wouldn’t buy the first purse you see in the store without checking if there are other purses cheaper and of better quality than your first choice. In the same way, accepting the first loan offer that comes your way hurts your chance of getting the best loan out there.
You should first check the legitimacy of the lender. Be skeptical when the company isn’t concerned about your credit history. You should also stay away from companies with suspicious sale tactics, pressuring you to act immediately and pay application fees upfront. They’re often fraudulent companies or scammers.
And when we talk about authenticity, you can never go wrong with your bank or credit union. Ask them about their rates but don’t stop shopping. Look at their close competitors and compare their offers. Don’t forget to consider online loan providers too.
3. You disregard other costs, like origination fees, interest, and penalties
There are other costs associated with the amount you’re borrowing. They could pile up in the long run if you overlook them and not ask how they are calculated.
Lenders, regardless of the loan you’re applying for, are likely to charge an origination fee that ranges from 0.5% to 6% of the loan. It is used to process your application though it doesn’t always have to be paid upfront. So if you’re taking out a $5,000 loan with a 2% fee, you end up paying $5,100.
After shopping around for lenders with the best interest rates, it’s also a good idea to research on how they are calculated. Basically, the interest amount increases based on three factors – the amount you borrow, the interest rate, and the duration of the loan. The more you borrow, the more money you’re paying interest on in the long run.
Lenders charge late payment penalty fees if you default on your monthly installment. We all know that. But we have this term called “prepayment penalty” also called “exit fee” if you decide to wipe out your loan ahead of schedule. Though it’s not usually associated with personal loans, it’s important to review your loan thoroughly to check for any hidden fees that could end up eating your money.
4. You don’t check your credit score
The basic idea is, the lower your credit score, the higher you’ll pay.
Lenders earn out of the interest accrued on the loan so they would like to know whether or not you have a tendency to default on your payments. If you’re perceived as a high risk based on your credit report, they’ll increase your interest rates. And if you impress them with your creditworthiness, there’s a great chance you’ll get approved for loans with lower interest rates.
So it’s a wise move to check your credit score first before applying for any loan. If you see that it’s low, do everything in your power to raise it. You can take some actions, like paying down some credit card debts, to improve your score.
5. You spend as you used to
Or worse, more often than you used to.
Needless to say, you have to adjust your money habits if you’re still not free from debts. However, it can be tempting when you shift the debt from high-interest credit card to a low-interest personal loan, since it frees up those cards for more spending. Learn to control your spending, or you’ll fall into a worse financial situation than you were in before.
Carmina Natividad is one of the writers for Speedy Money Payday Loans, an Australian-based business, providing short-term borrowing solutions. Like other young adults, she’s focused on getting a head start on her finances and she loves to write about wealth-building tips for millennials.