Personal loans are used for many reasons.
They often can help get you back on track financially. Imagine consolidating your credit card debt and paying it off with significantly less interest and in a shorter time, or finally being out from under the weight of your medical debt.
Ohhhhhh, wouldn’t that be a huge sigh of relief?!
Now imagine you don't do your due diligence and the personal loan becomes another crushing weight of debt around your neck.
If you want to avoid some of the most common (and harmful) mistakes people make when taking out a personal loan, take these five tips to heart.
Mistake 1 — Not being aware of your credit score
Lenders will be aware of your credit score whether you are or not, and they'll use that number to make you an offer.
You should know your credit score so that you can determine if the lender is giving you the runaround. They have no reason to give you a better deal than they have to, and you will have no way of knowing what you can get if you don't know your score.
If you’ve never had a personal loan you’ll want to be careful not to hurt your credit by applying to a bunch of loan providers.
Mistake 2 — Taking Out a Loan Will Hurt Your Credit
Taking out money doesn’t have to be a bad thing. It can substantially improve your credit if you pay on time and get reasonable terms. Don’t rush to pick a lender. If you get terms you can't afford, it will end up backfiring on you.
Lending is a big business for a reason, and just because the first place you go to seems right, that doesn't mean someplace else won't be better.
Shop for the best rate and loan amount for your needs. Unless your credit score drops terribly from the first offer to the next, those lenders and their offers aren't going anywhere.
Fiona is a free way to see what loan terms you can get without hurting your credit.
Mistake 3 — Not having a plan for your loan
It can be both frightening and powerful to receive a cash infusion. You might even be tempted to use some of it for fun.
You're far less likely to waste a substantial amount of your personal loan on non-essential expenses if you map out a plan before you get the money.
Pay your highest-interest debts first and work backward, using the loan where it works the hardest for you. Sometimes this may mean leaning on expert advice in the form of an advisor to help you save thousands on debt.
Mistake 4 — Not reading the fine print
Many lenders offer a competitive rate and don't mind if you pay off your loan in advance, but there are some who do care.
Look for pre-payment penalties as part of contract language, or simply ask.
In fact, ask your lender about everything you may have concerns about: late payment charges, loan origination fees, and check service fees. Don't hold back!
Mistake 5 — Not getting a pre-approved loan
The pre-approval process requires a soft pull of your credit, and while it's not a slam-dunk, it can give you a solid indication of your chances to be approved
This is important because the hard credit pull that a lender makes in verifying your finances will affect your credit score. Too many of those and your score will decline.
Mistake 6 — Do your homework before you get a personal loan
Knowledge is your friend — know your credit score and talk to multiple lenders before determining which benefits you best.
Use your loan wisely and don't be afraid to talk to an advisor if things get tricky; you'll find that a personal loan can be the first step out of debt once and for all.
Remember, it’s OK to go into debt if you can afford to pay it back.