Mistakes to Avoid When Taking Out a Personal Loan or Getting a Pre-approved Personal Loan

Personal loans are typically unsecured installment loans that borrowers can use for anything they choose. This type of loan can offer people to borrow money for many different purposes, usually at a much lower interest rate compared to what you’d get if you will use a credit card.

A personal loan can be a huge help in multiple situations. For example, these loans can be used to start a small business or deal with an emergency medical expense. Even with these perks, personal loans come with risks, like any other loan types, that you need to be heedful to avoid.

For a little help, here are a few common mistakes that people usually make when taking out a personal loan. Read on to know more!

Missing Payments

Personal loans do not require collateral. However, just because you don’t need to put up any collateral does not mean that creditors don’t have any alternative or possible course of action if you default on your payments. 

On the opposite, you run the possibility and danger of being reported or set forth to the credit bureaus. That said, your credit history report will manifest your default payments or late payments. As a result, you will have a hard time getting other loans or have a preapproved personal loan.

Borrowing More Than What You Can Afford To Pay

A personal loan may seem or appear like free money. However, keep in mind that you need to repay it, with interest. Additionally, take note that the more money you borrow, the higher the interest you will need to pay. 

Therefore, be extra careful not to borrow a big sum. Instead, only borrow the right amount of which you actually need, and you can repay over time.

Hidden Fees

Some creditors will attempt to make money by making loans more costly in many different ways. 

For example, lenders might hide different costs or will persuade you to purchase credit insurance, seemingly to secure them if they cannot make the payments, become ill, or lose their jobs. These add-ons are considered as hidden interest, take note of that.

Not Looking Around

Keep in mind that different lenders offer different terms, which can greatly vary. In fact, according to the researching manager for LendingTree, Kali McFadden, their research always shows that the very same individuals get different annual percentage rates (APR) offers for identical or similar loan sizes or terms.

The higher the credit score of a person, the wide-reaching the gap. That said, the first thing a borrower needs to do is to look around and search for different creditors to determine who’s offering the best terms. As per the research from the LendingTree, those with scores as high as 760 can save at least 50% interest by opting for the best option than the worst. On the other hand, those with credit scores between 640 and 679 can save at least 25%.

Variable Rates

Another common mistake is not understanding or knowing variable rates, specifically what these rates can do to your monthly payment. Say, for instance, the lowest variable rate makes a payment that is already beyond your budget, then you may face real struggle staying on top of your payments, particularly if that rate increases. 

Variable rate loans aren’t the issue themselves. However, it is essential to ensure you can afford your monthly payments if your rate goes up.

Scam

These days, it has become much easier and straightforward to obtain a loan due to the surfacing of online lending platforms. Even so, the convenience and ease of use come with more risk or possibilities of falling for a scam.

Fortunately, you can help secure your identity and your credit by being extra careful and heedful for red flags like 100% credit approval. Do read the list of warning signs from the Federal Trade Commission to know more.

Credit Status

When it comes to taking out a personal loan, your credit status is critical. With a great credit history and credit score, you have a high chance of getting your loan application approved. But the problem is that many people have no idea of their credit status, and usually under- or over-value their credit standing. 

As a borrower, you are subject to the evaluation of the lender, which they rigorously assess to make sure that they are working with an individual that can repay loans. That said, you need to know your credit standing first to settle anything on your account.

Takeaway

When you are planning to take out a personal loan, look not only at the loan amount but the loan size of the monthly payments and if you can afford to pay them. Know your DTI (debt-to-income-ratio) to weigh your obligations to your gross monthly income.