An increasing number of borrowers are taking out online personal loans.
For people who want to consolidate debts or finance certain expenses, securing a personal loan is one of the best options. This loan type can also be good for borrowers with poor credit (check out Match Financial's personal loans for bad credit for that purpose).
However, before you look for a personal loan provider and send your loan application, you should ensure that this loan option is good for you. Some personal loans that you can find on the internet have exorbitant rates and fees. So, it’s only advisable to research about personal loans and ask relevant queries to the lender.
Also, you want to avoid the typical mistakes borrowers make when applying for online personal loans. Here are some of the common blunders you need to avoid, especially if you’re a first-time loan applicant.
Not Checking Your Financial Situation
It’s always smart to take a look at your financial situation before you apply for a loan. Assess your income and expenses per month to ensure if getting an online personal loan is good for you. In this way, you’ll also know how much you can afford to pay for the principal and interest, giving you an idea of how to budget your monthly loan repayment.
Don’t rush into taking out a personal loan. Many people send their loan applications without considering their finances. As such, most of them get higher loan amounts and expensive interest rates that they can barely afford to pay back. You have to understand that if you miss payments on your loan or fail to pay it in full, your credit score will be negatively affected.
Always think before you apply for a personal loan because there are consequences to your decision. When money is involved, you should see to it that you weigh in the pros and cons to avoid spending way more money than what you have borrowed.
Not Reading the Fine Print
Loan borrowers often overlook the terms and conditions when they apply for an online personal loan. Most of the time, marketing doesn’t live up to reality. For example, there’s the promise of affordable interest rates, but, in reality, they’ll cost a borrower more money in the process.
So, it’s essential to read the contract’s terms and conditions carefully to avoid getting duped by captivating ads and smooth sales talk. Make sure that the loan amount, annual percentage rate, and maturity date of the loan are written on the contract.
It’s also important that you know the ancillary fees and penalty charges of the loan. For instance, most loans come with early-payment or late-payment penalties. You don’t want a loan with too many extra charges, especially if they are too expensive.
You should do your research about the lender and read customer reviews to ensure that you’re dealing with a trusted and ethical lender. Some online lenders are not really lenders but scammers who just want to rip off money from people.
Not Giving Importance on Your Credit Score
Your credit history plays a big role in your loan application. It's proof of how good or bad you’re in managing your finances. Lenders will always prefer a borrower with a good to excellent credit score. That’s why before you borrow money from a loan provider, make sure that you have good credit.
Credit unions, banks, and online loan providers also offer personal loans with favorable rates and payback periods to borrowers with no bad marks on their credit reports. If in the past you have missed payments on your debts that led to a bad credit score, take some time to improve it before you take out a new loan.
Choosing Longer Repayment Periods
When deciding on the payback period of your loan, it will be better if you choose a shorter payback term. Short repayment periods can be a great money-saver because you’re only incurring interest on the months you’re paying the loan.
Many loan applicants will choose longer payback periods because of the lower payments every month. But the disadvantage with this is that you’re paying the loan for a longer-term, meaning the overall cost you have to pay at the end of the day is higher. So, if you can repay the loan in a short period of time, choose a shorter loan term.
Applying for Multiple Loans Simultaneously
It will hurt your credit if you opt to apply for several loans at the same time. Many loan applicants do this tactic to make sure that they can borrow money from one lender even if they get rejected by another.
Takeaway
Borrowing money through a personal loan can benefit you in several ways. But you also have to understand that there are negative consequences if you don’t consider your financial circumstances when taking out this loan option. Take note of the list mentioned above to know the common blunders loan applicants commit when getting a personal loan.