Personal loans are incredibly versatile, allowing you to use the funds for just about anything you want with few limitations. You can use them to consolidate debt, renovate your home, cover emergency expenses, or pay for a large purchase.
But if you’re not careful, there are a number of personal loan mistakes you may make along the way, and they can end up costing you more money in the end.
9 personal loan mistakes to avoid
As you shop around and compare your options, then start making payments, here are some ways things can go wrong and what you can do to avoid making mistakes along the way.
1. Missing out on a better deal
Unlike credit cards, which can offer a wide array of different features, personal loans function largely the same regardless of where you get one. That said, there are some features that can vary from lender to lender, including interest rates, repayment terms, and upfront fees.
While it may be tempting to accept a mail offer you’ve received or to go with the first lender you find online, take some time to shop around and compare personal loan options from at least three to five lenders to ensure you’re getting the best deal.
In many cases, you can get rate quotes from lenders with just a soft credit check, which won’t impact your score, but some lenders don’t offer this feature.
However, going through the prequalification with each individual lender can be time-consuming, and it can be difficult to keep all of the offers straight. To speed up the process, use Purefy’s personal loan comparison tool to view rate quotes from multiple lenders side-by-side.
2. Borrowing more than necessary
Depending on the lender, you may be able to borrow anywhere between a few hundred dollars and upwards of $100,000. But if you borrow more than you actually need, you’ll end up paying unnecessary interest.
Before you take out a personal loan, nail down exactly how much money you need to accomplish your goal. If you’re consolidating credit card debt, simply add up the balances you want to pay off.
If it’s for another purpose, carefully consider the expenses you want to use the personal loan for to ensure that you only borrow what you need.
3. Failing to read the fine print
For the most part, personal loan companies advertise the most important terms up front, including the interest rate, origination fee, and repayment terms. However, other terms, such as late fees, prepayment penalties and more may be hidden deep in the fine print of the loan contract.
Before you sign the loan agreement, make sure you read through the terms and conditions of the contract so you know what you’re agreeing to. While you may not be bothered by something like a prepayment penalty or a late fee, knowing what to expect can help you avoid potential surprises.
Compare Personal Loan Offers From $600 to $100,000
Compare Personal Loan Offers From $600 to $100,000
4. Failing to create a budget that works
Before you sign the loan agreement, you’ll be able to see how much the loan will cost you each month. But if you accept the loan without seeing how that payment fits into your budget, it could wreak havoc on your finances.
Even if you can make the monthly payment without going over budget every month, having additional debt could potentially impact your ability to save and invest for the future, pay your full monthly credit card bill, and cover your lifestyle needs.
Before you even apply for a personal loan, consider using an online personal loan calculator to get an idea of the true cost of the loan, including the interest you will pay over the life of the loan. Then, take a look at your income and expenses to determine whether you can afford the monthly payment without putting a strain on your budget or sacrificing other important financial goals.
5. Sliding back into trouble
If you’re planning to use a personal loan to consolidate high-interest credit card debt, you’ll notice that the available credit on your cards will be immediately freed up once the consolidation is completed.
If you’re not careful, you could end up racking up another large balance on your credit cards, which can put even more strain on your budget and possibly make your debt payments unaffordable. In an extreme case, you could be facing bankruptcy, which could damage your credit score significantly.
To avoid this fate, take steps to limit or even stop your credit card usage while you work to pay down your debt. For example, you can cut up your credit card, then request a new one from your card issuer when you’re ready to start using the account again.Â
It’s also crucial to get on a budget if you’re not already using one so that you can avoid spending more than you can afford to pay off every month. The key is to understand and change the habits that put you in a difficult financial position in the first place.
6. Only comparing paymentsÂ
As you shop around, you’ll be able to see estimated monthly payments from each lender. While it’s tempting to focus on that figure, it’s far from the best metric to gauge your total costs.
In addition to the interest rate, you’ll also want to look at repayment terms — maybe one lender offers a lower payment, but if it takes you a year or two longer to pay off the debt, your total costs will be much higher.
A personal loan calculator can also help you calculate the total interest charges on a loan, making it easier to ensure you’re getting the best deal available.
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7. Losing out on rewards and protections offered by credit cards
If you’re thinking about using a personal loan for something you could cover with a credit card, you may be better off with the latter option.
Many credit cards offer sign-up bonuses and introductory 0% APR promotions to new cardholders. Depending on which card you choose, you could earn hundreds of dollars in the form of cash back, points or miles, as well as hundreds of dollars in interest savings.
Keep in mind, though, that the best rewards and 0% APR credit cards require good or excellent credit to get approved — according to FICO, that typically means a credit score of 670 or above.Â
Also, remember that credit cards charge higher interest rates than personal loans on average, so if you’re in danger of carrying a balance with interest, you may get more long-term savings from a personal loan.
8. Using personal loans for the wrong reasons
There are a lot of ways you can use a personal loan, but some uses may be restricted depending on the lender. For example, most lenders won’t allow you to use a personal loan to pay for educational expenses. Even if you could, you can generally get a lower interest rate on a federal student loan than you could with a personal loan.
Additionally, you may not be able to use your funds for investments or to cover business expenses. Also, mortgage lenders typically won’t accept personal loan funds as a valid source for a down payment on a home.
9. Not setting yourself up to get the best rate
Before you apply for a personal loan, it’s important to review your credit score and reports through each bureau to gauge your overall credit health. While it’s possible to get a personal loan with a single-digit interest rate, those terms are typically reserved for borrowers with high credit scores.
If you have fair credit or below, you may see rates in the range of 20% to 36%, or even higher in some cases.
As you check your credit, take a look at areas that need some work, and consider addressing them before you submit a personal loan application. For example, you may consider paying down your credit card balances a bit or getting caught up on past-due payments.
Additionally, it’s important to look for inaccurate or incomplete information on your credit reports that could be negatively impacting your credit score. If you find something, you have the right to dispute it with the credit bureaus and request to have it removed or revised.
While increasing your credit score can take time, it could save you hundreds or even thousands of dollars in interest on your personal loan.Â
Get started with Purefy
If you’re thinking about getting a personal loan, Purefy can help you compare personal loan interest rates, as well as repayment terms, fees, and other features that are important to you. You’ll simply provide a few details about yourself, and within two minutes, you can compare quotes from multiple lenders with no impact to your credit score.Â
Once you choose a lender, you’ll be able to select your offer and apply through the lender’s website. You’ll typically need to provide basic details about yourself and some documentation to verify your identity and income. The lender will perform a hard credit inquiry and give you a final offer based on its underwriting process. At that point, you can accept the loan and receive funds, usually within 1-3 days (depending on the lender).
As long as you thoroughly research your options and understand the repayment terms of your personal loan, you can avoid some of the mistakes mentioned above.
