When considering a personal loan, it is important to avoid certain pitfalls that can lead to financial difficulties. One thing to avoid is taking on a loan with a high-interest rate, as this can significantly increase the total cost of the loan. It is also important to avoid taking on a loan that is too large for your budget, as this can lead to difficulties in making timely payments and potentially damage your credit score. It is always a good idea to shop around and compare offers from multiple lenders to ensure you get the best deal and the most favorable terms.Best Personal loans
But First: How Do Personal Loans Work?
A personal loan is money lent by a bank, credit union, or third-party lender for all purchases, such as consolidating debt, refinancing, or making a big purchase. They typically come with lower interest rates than credit cards, making them a popular financial tool. However, like other forms of credit, personal loans should be taken out responsibly.
Here are a few common personal loan terms you’ll see that will help you better understand the application process and which we’ll mention throughout this article:
- APR: Annual Percentage Rate, or APR, is one of the most important terms to understand. There are often fees associated with taking out a personal loan, such as an origination fee or application fee. The APR has all of the fees plus the interest baked in so you can see the real cost of the loan. Always look at the APR when comparing lenders.
- Principal: This is the amount you’re borrowing. So if you apply for a personal loan of $5,000, that number would be considered the principal. As you pay off the loan, this amount will gradually decrease, but the APR charge will stay the same (assuming it’s a fixed and not variable rate).
- Interest: The interest is essentially what the lender charges to lend you the money you’ll repay over the life of the loan. Every month, you’ll pay back a piece of the loan amount (the principal) plus the monthly interest, which is typically a percentage rate.
- Monthly Payment: The monthly payment made to the lender will include a portion of the principal you owe as well as the interest which you’ll be obligated to pay over the course of the loan.
- Origination Fees: This is an upfront fee some lenders will charge you when processing your loan application and can sometimes be referred to as points. Not all lenders charge an origination fee, but if they do, it will be calculated into your APR.
Now let’s move on to some of the most common personal loan mistakes you can avoid this season!
#1 Not Checking Your Credit Report
Before you start sending in personal loan applications, check your credit report. You’re entitled to one free credit report each year from the three major bureaus—TransUnion, Experian, and Equifax.
If you’re curious about what your financial profile looks like, this is your credit report. It’s a breakdown of all of your credit history and is crucial when it comes time to apply for loans of all types since it’s something lenders will examine to determine your creditworthiness.
Here is what you can expect to find on your credit report:
- Your name
- Current and previous addresses
- Date of birth
- Social Security number
- Phone number
- All current and previous credit accounts and account types, such as loans, mortgages, etc.
- The credit amount and limit
- Account balances and payment history
- Opening and closing date of accounts
- The name of the lender/creditor
Public Records and Inquiries
- Civil suits
- Companies that have looked at your credit report
As you can see, your credit report provides incredibly detailed insight into your financial standing, past, and present, so yo