Personal loans can be a great way to close gaps in your budget, fund important purchases, and help when you need a lump sum of cash between paychecks. They are a valuable investment tool if you know how to use them, but they can also quickly become a financial risk without the right education and planning.
By considering these topics, you can avoid costly personal loan mistakes that could harm your credit.
1. Research Lenders Carefully
When it comes to lenders, you only want the most reputable financing for your loan. Avoid payday loans that come with high-interest rates, as you can often wind up paying half or more of your balance. As for lenders, banks and credit unions are always the most reputable. Closely research each company to ensure they are a trustworthy lender.
2. Look at the Interest Rates
To get a good interest rate on a personal loan, you’ll need a good credit score, somewhere around 720. Lower credit scores can accrue higher interest rates. The important thing to consider here is not just the interest rate itself but whether you are obligated to pay all of it for the loan term if you happen to pay your debt off early.
Some lenders require customers to pay a certain amount of interest, even if they have the funds to pay off their balance. It’s important to consider how much the interest rate on a personal loan will affect your budget over time.
3. Think About Your Other Loans First
Are you able to balance another debt on top of bills, credit cards, and student loans? You may want to look to streamline some of your outstanding balances first before taking on another major financial commitment. You may consider refinancing student loans, which merge all your debts into one payment by borrowing a larger private loan to pay them off.
When you refinance, your student loans are paid off by the lender, and in exchange, you pay off the total balance to them over a period. Refinancing can lower your overall burden, reduce monthly payments and interest, and help you get out of debt faster. Read more about the pros and cons of student loan refinancing to decide whether it’s the right call for you.
4. Consider a Savings Account
Is a personal loan 100% necessary, or could you acquire what you’re looking to fund with the money through strategic savings? Sometimes, people want to borrow personal loans because it’s easier than waiting to save.
But overall, when you are managing your personal wealth taking the time to use their own money is a far less expensive option. You might even qualify to open a high-yield savings account, which generates money each month and can help you earn hundreds or thousands of extra dollars a year with consistent contributions.
5. Watch Out for Fees
Make sure the lender does not have hidden fees that could cost you money. There may be fees for applying for the loan, prepayment fees, and more that add hundreds of dollars on top of your balance and interest.