A personal loan can be a stitch in time that saves nine, provided that you use it cautiously and know how it works. It can help you reach your financial goals, reduce your financial burden, get an education, cover financial emergencies, or even make an investment. But if you want a loan to act as a financial instrument and not become a heavy yoke, you need to take some actions at the selection stage.
Forewarned is forearmed, so we’re going to tell you about the most common personal loan mistakes that people make. This way, you will be able to avoid them and make the most of your personal loan.
Know Before You Owe: Things to Avoid When Getting a Loan
Below is a kind of “financial destruction” for borrowers. So, read the wrong advice and do the opposite!
Failing to Check and Improve Your Credit Score
Your credit score is a numeric expression of your financial behavior that typically ranges from 300 to 850. It serves as an indicator of your borrowing capacity for conventional lenders. A credit rating is made up of your payment history, credit usage, credit mix, new credit, and the length of your credit history. These factors show how you manage your finances and debt in the long run.
If you have a good credit score, which is usually over 670, lenders will be more willing to offer you better loan terms and lower interest rates. But if your FICO rating is low, you may experience challenges on your way to getting a loan.
Of course, the lending industry is evolving. Online lenders and innovative fintech brands offer loans without looking back at applicants’ credit scores. Although you can get a 500 dollar loan while having bad credit, you shouldn’t expect it to be cheap. Bad credit loans have one thing in common: all of them have a much higher interest rate than those for people with strong credit.
Thus, it’s better to know your credit score. You can request your credit reports from each credit bureau for free once a year. If your score falls under the “bad” category, you’d better take some time and steps to boost it so as not to overpay.
Start with checking your credit reports for errors or inaccuracies. Make all your payments on time and keep your old credit accounts open. You can also consider getting a secured credit card or a credit builder loan. These forms of debt can help you improve credit within several months, provided that you pay on schedule.
Applying for The Wrong Type of Loan
Each type of loan has its own perks and drawbacks. Loans are usually designed to meet the needs of particular groups of borrowers. The lending market now offers personal loans, credit cards, auto loans, home equity loans and lines of credit, payday loans, and more. Each of them meets a certain demand and may not work for you if you try to use them in a different way. That’s why it’s important to choose the loan type that suits your financial goal.
For example, if you are looking for a long-term solution and need a significant amount, payday loans are obviously not your option. Additionally, if you plan to use the money from time to time and don’t know exactly how much you may need for your life project, a personal loan is also not the best pick.
First, decide on the loan purpose and terms that will fit your budget. Then, learn more about available options and choose the one that is close to your expectations. Seek help from credit counseling if you find it difficult to choose a suitable loan on your own.
Borrowing More Than You Can Afford
Before you owe, create a budget to ensure you have spare money to make your monthly loan payments. List all your earnings and regular expenses, including rent, bills, and other debt payment obligations. Then, deduct your expenses from your monthly income. The remaining amount is the one that you can count on when repaying your potential loan.
You shouldn’t borrow sums that exceed this number. Otherwise, you can get into a debt cycle, which is pretty hard to break. Also, try to avoid taking personal loans just in case. If you want to have extra money to use in case of emergencies or unexpected expenses, you can get a credit card or a home equity line of credit. They allow you to pay interest only for the amount you actually use.
Not Shopping Around for The Best Rates and Terms
Accepting the first offer you get is fraught with higher interest rates and less favorable terms. If you do not review the lending market regularly, you may not know what loan conditions are considered acceptable. Thus, you have no idea what you should look for. Therefore, you’d better compare at least a few options offered by different lenders in order to understand the average interest rates and loan terms offered at the moment.
Many lenders now allow borrowers to prequalify for loans without affecting their credit scores. Thus, applicants can understand what loan terms they can expect based on their credit history, income, and other financial details. When you prequalify, you’re not obliged to accept an offer. This allows you to shop around and do your research before going into debt.
Ignoring Fine Print in a Loan Agreement
If you don’t want to find yourself in an unwanted negative situation, you should pay attention to what’s written in fine print. In most cases, there will be some important notes, additional fees, or particular terms that clarify or amend specific conditions. Sometimes fine print can also determine circumstances that will make certain clauses of the loan agreement valid.
Thus, if you want to understand what you’re about to enter into, read your loan contract carefully before signing. And never skip the text written in the fine print.
Not Checking a Lender’s Requirements
Each personal loan application drops your credit score by a few points. Although you can fix it quickly by making on-time loan payments, there’s still a chance that you will be denied a loan if you don’t meet the lender’s requirements. This way, your credit score will go down, and you will not get a loan.
We recommend you to always check the lender’s requirements before applying to avoid unpleasant surprises. Send a loan request only if you are sure you meet some basic criteria set by a lender.
Failing to Prepare All The Required Documents and Information
Each lender has certain document requirements. You need to check them out and prepare all the information needed. The more organized you are, the better. First, it will help you speed up the application process. As a result, you will be able to get the funds faster. Second, a lender can reject your loan application if you don’t provide a full set of documents or if they are inaccurate.
A loan can be a useful financial instrument for those who use it wisely. Knowing these seven common mistakes will help you prevent them and make the most of your personal loan. Making an informed borrowing decision will save you a headache throughout the process.