4 Mistakes to Avoid When Taking out a Personal Loan
Taking out a personal loan can be an important step in securing a healthy financial future. Even if you suffer from bad credit or have a lots of credit card or student loan debt, there are plenty of loan providers who can help you consolidate your debt under a loan with a better rate, or deal with a one-time expense or cash flow problem responsibly.
If you do need to take out a personal loan, it’s important to do it the right way. So what are the biggest pitfalls to avoid when taking a loan? Let’s take a look.
1. Don’t Take a Payday Loan
Payday loans are fast, easy to get and you don’t need to provide any information about your financial situation in order to get one. However, they are not without disadvantages. Interest rates for the average payday loan can reach over 300% and the lenders are notorious for pursuing debtors in unpleasant ways. A loan aggregator like LendingTree, on the other hand, can get you loan offers from lenders that require less than stellar credit, at APRs as low as 4.99%.
2. Don’t Automatically Take the Loan with the Lowest Rate
The lowest interest rate is always attractive, but that doesn’t necessarily mean it’s the best deal. For example, if you hope to be able to repay your loan early then you want a loan that doesn’t charge any early prepayment fees.
Some lenders hide high loan origination and arrangement fees under the front of their low APR, so compare the TAR—total amount repayable—and not just the APR. Personal loan marketplaces, such as LendingTree, let you choose from a number of lenders, allowing you to make sure all of the terms of your loan, not just the APR, are right for you.
3. Don’t Ignore Your Credit Score
Your credit score will help determine how much interest you have to pay on your loan. If you apply for a loan without checking your credit score and then get rejected, that will lower your credit score even more.
Look up your credit score before you start applying for a personal loan—it’s free—so that you can choose a loan that fits your credit standing. Even if your credit score is low, it’s best to know in advance and approach one of the lenders that offer loans for bad credit, such as LoansUnder36, instead of risking being rejected for a loan.
4. Don’t Borrow from Friends
Beyond the obvious clichés about the folly of mixing money and friendship, there is also a sound financial reason for not taking a personal loan from a friend, or even a family member. Your credit score is dependant on you proving your ability to pay off debt in a timely fashion.
If you take a loan from a personal loan provider, there will be a record of you paying off your loan, and subsequently your credit score will improve. If you take a loan from a friend, you may pay it off in time and keep your friendship intact, but you won’t improve your credit score.
Check out our comparison of the leading personal loan providers for more information.