Personal loans can be a powerful financial tool that allows you to manage cash flow while also allowing you to make a major purchase, but they’re not universally beneficial. Two different people could take out two loans to fund the same purchase, and have two very different outcomes.
Ultimately, while there are a lot of benefits to taking out a loan, those benefits will only be unlocked if the borrower takes the right approach to getting their hands on a loan. All too often, borrowers make common — yet easily avoidable — mistakes that end up harming their application or the value of the loan.
In this post, we’ll run through just some of the most common personal loan errors people make, as well as offer some advice on how you can avoid making them yourself.
Focusing On The Monthly Repayment
Between the two, everyone would prefer to have a lower monthly repayment than a higher one. Yet, while it’s easy to be tempted by a low monthly payment, that shouldn’t be the only cost that you look at. In fact, it should even be the main one. It’s the overall cost of the loan that should take precedence. A lower monthly payment will have longer term times, which means you will likely end up spending much more over the course of the loan term than if you’d taken a higher monthly payment. In some cases, you’ll pay around 3 times more in interest on loans with lower monthly payments (but longer loan terms) than higher monthly payments with shorter terms.
Failing to Browse The Market
To say not all loans are created equal would be an understatement. Many people seeking a personal loan go directly to the most obvious sources, such as their bank, and take the first offer they’re given. Yet that approach is an almost guaranteed way to end up with costlier loan terms.
Shopping around to compare offers can ensure that you get the best possible deal, and it couldn’t be easier. Loan comparison companies like forbrukslån allow you to quickly compare the interest rates of different lenders, as well as other key lender details, which can increase your chances of choosing a loan that’s best for you. You’ll lose nothing by taking the time to see what loans are out there, yet it might just save you thousands.
Taking More Money Than Necessary
You can see why people are tempted to borrow as much as they’re offered. You might need $5000 to make the kitchen improvements you’d had your mind on, but if the lender says you qualify for a $10,000 loan, then you might just revise your plans to make the kitchen a little grander than originally conceived.
But should you? While it can be nice to imagine the possibilities that having extra money in the bank might bring, remember that this isn’t free money. You’ll be paying it back plus interest, and the more you borrow, the more you’ll pay.
Overlooking the Impact of Credit Score
Your credit score might just seem like a number, but it can have a big influence on your financial life, especially when you’re taking out a loan. It’s one of the main instruments that lenders use when deciding which personal loan interest rate you qualify for.
If you have an excellent credit score, then you’ll likely be offered a loan in the region of 10-12.5% APR. If you have a poor credit score, the APR of the loan you’re offered could be 25% or more.
Since the APR significantly impacts the overall cost of the loan, it can be worthwhile to check (and potentially improve) your credit score before you submit a loan application. If your score could be a little better, then making timely payments, paying down your credit card balances, and disputing any errors can help move the needle in the right direction within a few months.
Ignoring the Terms and Conditions
Most people don’t read terms and conditions before agreeing. Contracts can be long and difficult to understand, and it’s also easy to believe that there’s nothing in there that’s out of the ordinary.
While you might reasonably skip the terms and conditions of the next app you download, it’s a different story when it comes to taking out a personal loan. There could be a few details in there that could impact your overall experience of getting the loan, especially if you don’t know about them. For instance, the payment methods the lender accepts, how they take payment (automatic vs manual), and any penalties incurred by late or missed payments.
Reading the terms and conditions should only take you 30 - 45 minutes or so, yet it can be vital for understanding precisely what to expect from the loan.
Applying to Multiple Lenders
Applying for loans from multiple lenders within a short timeframe can seem like an effective way to maximize your chances of getting a good loan, but it’s best avoided. Loan applications prompt an inquiry into your credit history, which in turn can lower your score if they’re done multiple times. The presence of recent loan denials or pending applications on your credit report can also be a warning sign to other lenders.
Note that there’s a difference between making an application and going through the pre-qualifying phase. Prequalification inquiries don’t involve performing a credit check, so you can feel free to make many more of these. It’s just the number of actual applications you make that you need to be wary of.
Overlooking the Importance of Savings
Building your savings account is beneficial for multiple reasons. First, lenders like to see a good overall financial profile, since it signals that you’ll be more likely to pay the loan back on time. The other reason is that having some extra cash in the bank can help you to make monthly payments if you go through a tough financial spell, such as losing your job. If you have time, then consider building your savings before applying for a loan.
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