A personal loan empowers people with added financial power. A loan can be used for many reasons: home improvements, paying off debt, improving your credit, paying for your wedding ceremony, creating an emergency fund or starting a business.
While the flexibility of a personal loan is appealing, there are mistakes consumers tend to make that can cost you a significant amount of money over the life of the loan.
Here are 5 common mistakes to avoid when taking out a personal loan.
Consumers often fail to review their own credit scores, taking the lender at their word when they “check” their credit and give an offer.
You may be able to get a better deal elsewhere, but you won’t be able to tell if you don’t know your score first.
The less of a risk you are perceived to be, the cheaper your personal loan will be. If you know your credit score is too low to get approved for a good offer, plan to improve it. Pay off some debt and start compiling a good record of on-time payments.
Lender terms can vary widely, and interest rates on personal loans are generally higher than those on mortgages or car loans. When you’re seeking a personal loan, don’t just go to one financial institution. Shop around for the best rate and lowest fees.
Remember, the loan with the lowest rate isn’t automatically the best deal, as other fees contribute to the total cost, which is reflected in the loan’s APR.
If an offer seems too good to be true, it probably is. There are many online lending options, but not all of them are legit.
Watch for red-flag terms like “guaranteed credit approval.” You can find more warning signs in this list from the Federal Trade Commission.
Personal loans can be an effective way to tackle high-interest credit card debt or other bills that are accruing interest and late fees. However, if you run up new debt, you defeated the purpose of taking out the personal loan in the first place.
Once you secure your loan, make sure you make your payments on time. Late payments come with fees and can damage your credit score.
You may also end up losing the collateral if you took out a secured personal loan. Many lenders will deduct .25 off your rate if you sign up for automatic electronic payments.
Mistakes are unavoidable, but when it comes to loans, they can hurt your finances badly. Make the most of your loan, because it can help you achieve your goals and lead to a wealth of new opportunities down the road.