Personal loans are an attractive option for many borrowers due to their versatility and low-interest rate. However, given that it isn’t free money and could affect your credit score, it’s important to create a plan to pay it back on time. If you decide to borrow a personal loan, here are some mistakes that you should look to avoid.
Not Checking Your Credit Score
Your credit score has a big impact on the interest rate you get offered. So, applying for a loan without checking your credit score is not something you should do. If your credit is not too good and you don’t have an immediate need for the loan, consider first working toward improving your score.
Opting for the First Loan That Is Offered
It’s important to compare different personal loans and the interest charged on these loans before you zero down on a particular one.
Getting a Loan with Precomputed Interest
Before you sign up for the loan, make sure to ask the lender how the interest is calculated. If the lender precomputes your interest, you could end up paying most of the interest during the initial years of your loans. If you intend to repay your loan before the end of the term, the precomputed interest could make your loan more expensive.
Paying High Fees
Make sure to check what fees the lender charges apart from the interest rate. Certain lenders charge an origination fee, which could increase the cost of borrowing the loan. You should also keep an eye out for the pre-payment penalty.
Missing Repayments
If you miss a loan repayment, your payment default could be reported to the credit bureaus, which would then lower your credit score. Fortunately, most lenders allow you to automate your payments.
While most lenders who offer personal loans don’t impose any restrictions on how the loan amount can be used, you should still evaluate your reason for taking a loan. It makes sense to take a personal loan if you are looking to consolidate your credit card debts or pay for emergency expenses. However, if the purpose of the loan is to make a luxury purchase or take a vacation, it’s best to avoid doing this with borrowed money.
