The Dos and Don’ts of Taking Out a Personal Loan
BySarah BadaniJan. 29, 2019
Taking out a personal loan can be a smart and highly-effective way to consolidate your debt, which is the most common reason to take out such a loan, or you can also use one to get the funds necessary to pay for a sudden expense. You might need to deal with an emergency, pay for a large household expense, or just cover a temporary personal cash-flow issue.
While a personal loan can help you financially, there can also be some pitfalls along the way. Here’s what you should and should not do when you take out a personal loan.
What to Consider when Taking Out a Personal Loan
Not all personal loans are created equal, and not every lender has the same concerns. Here are some things to keep in mind.
1. Do: Think About the Type of Loan You Need
Remember, there are both good and bad reasons for taking a personal loan. Make sure that the type of loan you’re taking suits your needs and that you can keep up with the payments. The most common type of personal loan for emergencies and temporary issues is an unsecured short term loan. An unsecured loan means that you don’t need to put up anything as collateral against the loan. The advantage is that you don’t risk losing your collateral if you can’t make payments. On the other hand, because you didn’t put down collateral, you tend to have higher rates with an unsecured loan.
A secured loan requires you to put something up as collateral like your house, your car, jewelry, or existing savings, but in exchange, you usually will get a lower interest rate. If you’re confident that you can repay the loan on time then a secured loan will probably cost you less overall because of the lower interest rates.
2. Do: Settle On How Quickly You Need the Loan
If you’re facing an emergency and you need the money sooner rather than later, then look for an online loan provider such as LendingTree or Credible which can get you approved in minutes. Companies like LendingTree can get you the money in a matter of days, unlike more traditional lenders, which can take weeks to get you the funds.
If it’s not extremely urgent, then feel free to take your time and shop around until you’re confident you’ve found the best deal for you.
3. Do: Find a Lender That’s Best Suited for You
While banks can often provide lower APRs and better terms, they tend to take longer to process loan applications and have significantly higher eligibility requirements than online lenders.
A number of lenders, such as Even Financial, have made lending to borrowers with lower credit a central component of their business model, and should be able to sort you out if you have lackluster credit.
Online lenders are also usually more flexible in their terms. For example, SoFi is an online lender that allows borrowers to suspend payments for up to 12 months if they run into financial difficulties. This can help you keep from getting more into debt if you lose your job or find yourself in thinner times and unable to make your loan payments.
You can also borrow from credit unions, which are more likely to lend to borrowers with poor credit scores. Another option is a peer to peer lending platform like LendingClub, which connects borrowers with lenders so that both sides find a better fit for their financial needs.
4. Do: Consider How You’ll Pay the Loan Off
Taking out a loan without mapping out a viable repayment plan is asking for trouble. Before you apply for a loan, work out how much you can reasonably expect to spend on repayments each month. If you’re relying on a future windfall like a promised bonus or your salary to pay off the debt in one lump sum, choose a lender like Marcus that doesn’t charge any early prepayment fees.
5. Do: Weigh the Repayment Terms
Look beyond the monthly APRs to check what repayment terms each lender is offering, including loan origination fees. LendingClub and GuidetoLenders are among the online lenders that don’t charge any origination fees and don’t penalize you for missed payments or personal check processing fees.
Some lenders ask for weekly repayments while others expect monthly payments. Still other lenders have the flexibility to let you choose whether you’d rather pay off the loan in weekly or monthly installments. Take your time to shop around, and you should be able to find one that can approve the repayment terms that are right for you.
6. Do: Make Sure the Rates Work for Your Budget
APR can be either variable or fixed-rate. Variable-rate loans are more likely to go up in interest rates than to come down, while fixed-rate loans are, well, fixed, and you know exactly what to expect each month.
There’s also the question of whether you’d prefer a short-term loan, which is around 3 years or less in length, or a long-term one. A long-term loan usually brings lower monthly payments, but because the repayment is spread out across a longer period of time you will end up paying more for the loan overall due to the interest.
7. Do: Read the Fine Print
Whichever personal loan lender you go with, you should always read the small print carefully. Look out for added fees and extras such as loan repayment insurance policies, which will be sold to you as vital for your piece of mind but are likely to be unnecessary.
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