8 Personal Loan Mistakes to Avoid

In today’s banking world, you’ve got a lot of different options to consider when you need access to money. One of the more popular options you may be considering is a personal loan — currently the fastest-growing debt type in the United States.

But as with any time you borrow money or make a major financial decision, there are some common mistakes to steer clear of. By fully understanding what personal loan mistakes are out there and how to avoid them, you can set yourself up for success.

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      8 personal loan mistakes and how to avoid them

      • Having no plan to pay off your loan
      • Not shopping for the best rate
      • Not fully understanding the terms of your loan
      • Borrowing more than you need
      • Forgetting about fees
      • Getting into trouble with variable rates
      • Missing payments or making late payments
      • Not asking questions

      [Read: Pros and Cons of Taking Out a Personal Loan]

      1. Having no plan to pay off your loan

      When you need money fast, it can be easy to ignore future concerns and focus on solving the problem at hand. And while a personal loan will meet your immediate needs, you are going to have to pay back that money in the future. It’s imperative that before you even think about taking out a personal loan, you come up with a legitimate plan to pay it back. Out of all the possible mistakes with personal loans, this is the one that can get you into the most trouble.

      2. Not shopping for the best rate

      Different lenders may offer you different interest rates on your prospective loan. If you only go to one lender and don’t shop around, you’ll never know if you’re getting the best rate. A little due diligence upfront could result in thousands of dollars of savings over the life of your loan.

      3. Not fully understanding the terms of your loan

      Your plan to pay off your loan starts with understanding all of the terms of your loan. How often do you need to make payments? Do the payment sizes ever change? What happens if you’re late on a payment? What’s at risk if you aren’t able to make all your payments? Are there options available if you lose your job? If you’re unable to definitively answer these questions, you’re making a big person loan error. Take the time to fully understand all the ins and outs of your loan before you sign on the dotted line.

      4. Borrowing more than you need

      When you talk to a lender, you may find out that you can be approved for more money than you need. While this may feel great and it may get you thinking about what else you can buy, it’s a slippery slope. Before you start shopping for a personal loan, determine the exact amount of money that you need. Even if a lender offers you more, only take the amount that you need. Every dollar over that amount means you’re walking straight into personal loan mistakes.

      5. Forgetting about fees

      The interest rate isn’t the only cost associated with most personal loans. Generally, personal loan companies will charge a whole host of other fees like origination fees, application fees and late fees. When you’re making your plan to pay back the money and weighing the risks vs. the rewards, fees need to be included in your calculations. If you only focus on the interest rates, you’re going to have a rude awakening when the cost of borrowing is higher than you planned for.

      6. Getting into trouble with variable rates

      One of the big decisions you have to make when getting a personal loan is fixed rates or variable rates. A common personal loan mistake is that people see the lower rate with the variable loan and make that choice. The problem? The variable rate is not the rate you’re going to pay the entire life of the loan. After an agreed-upon period of time, the variable rate starts to fluctuate with the market. What this means is that the cost of borrowing could unexpectedly go up on you, which could create some serious and unexpected problems. If you choose a variable-rate loan, make sure you understand what you’re committing to.

      7. Missing payments or making late payments

      No matter what mistakes you make with getting your personal loan, they all pale in comparison to missing a payment or making late payments. Most of the other mistakes result in a more expensive loan but have no major effect on your credit score. When you start missing payments, though, you can really tank your credit. This is the real reason it’s so important you have a plan to pay off your loan and fully understand what you’re signing up for. A single late or missed payment can stay with you for years.

      [Read: Can Personal Loans Improve Your Credit Score?]

      8. Not asking questions

      When you’re going through the loan process and you don’t understand something, ask questions. For some reason, whether it be ego, laziness or shyness, some people avoid asking for clarification on aspects of the loan they don’t understand. Don’t worry if you think you’re going to look silly by asking a question. You’ll look much sillier down the road if you put yourself between a rock and a hard place because you agreed to terms you didn’t fully understand.

      Personal Loan FAQ

      A personal loan is an agreement between you and a bank, credit union or lender where you are given a sum of money upfront that you’re required to pay back with interest over time. Unlike some other forms of loans, personal loans rarely require the borrower to put up collateral to secure the loan. This lowers the borrower’s risk but increases the cost of the money.

      Depending on what type of mistake you make on your personal loan, it could affect your credit. If you make a mistake like missing payments or not being able to pay back the loan, it will absolutely have an effect on your credit. If you make a mistake like not shopping for rates, it might not affect your credit, but it will make the total loan cost more expensive.

      [Read: Secured Personal Loans vs. Unsecured Personal Loans]

      We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

      Jason Lee

      Contributing Writer

      Jason Lee is a U.S.-based freelance writer with a passion for writing about dating, banking, tech, personal growth, food and personal finance. As a business owner, relationship strategist, and officer in the U.S. military, Jason enjoys sharing his unique knowledge base and skill sets with the rest of the world. Follow Jason on Facebook here