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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.
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
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.
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.
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