When you’re strapped for cash, a personal loan may seem like an obvious solution. If personal or consumer lending companies or banks are calling you, unpaid bills are stacking up, and the refrigerator is as empty as your bank account, you might decide to look for a personal loan.
However, going down that road can lead to unwanted consequences and could potentially make things even worse, according to financial and money experts.
If you take out a personal loan without thinking ahead, you may find yourself scrambling to make payments down the road, which would leave you dealing with the same problems that caused you to take out the loan in the first place.
Here are five factors to consider before applying for a personal loan, according to www.supermoney.com
- Bad credit personal loans have high interest rates
Taking out a high-interest loan with bad credit is like trying to fill a hole by taking out more dirt from that same hole. However, with a high enough credit score, you can find a personal loan at a low interest rate. Find out what rates you qualify for without hurting your credit score with your local bank or one of those personal loan companies.
Those rates are much higher than a traditional credit card, which could be a better option. Nigerian banks now offer credit card loan to working class customers. High rates can make it harder for you to repay the loan and remain solvent. Plus, taking out a new loan will hurt your credit score and make it harder to find a way out of your debt.
- They have shorter terms
Most personal loans have three-year terms, which are often shorter than other types of debt. That usually means higher payments because you are paying it off over a shorter amount of time. High payments could make it harder for you to pay your bills in case you lose your job or have an unexpected emergency. In fact, most banks offering personal loans especially the unsecured loans usually give a maximum repayment period of one year.
- You might pay more in interest
Many people take out personal loans to pay off smaller loans so that they’ll only have one payment to think about. But some people inadvertently sign up for higher interest rates without thinking about it. Make a list of the debt you have and the interest rate. Compare that with the personal loan offers you see. If your rates are lower, then it’s better to keep the loans you have.
- You might lose special protections
Some people try to take out personal loans to pay off other loans, which can have high-interest rates. If you pay off your other loans with a personal loan, you lose all the perks of having a better loan.
Instead of taking out a personal loan, try to pay off your other loans as quickly as possible and then focus on tackling your other debt.
- They may not solve your problem
Sometimes, a personal loan only fixes the symptoms, not the bigger problem. If you have a lot of debt and are considering a personal loan, ask yourself whether it will really fix your finances.
Many financial experts believe that solving a debt problem with more debt doesn’t really fix the problem. Before you take out a loan, think about getting a second job, refinancing your debt, or using your emergency fund.
Alternatives to personal loans
Not interested in a personal loan, but still need the money? Here are some good substitutes:
Zero per cent balance transfers
One of the best alternatives to a personal loan is a zero per cent annual percentage rate balance transfer from a credit card. If you have credit card debt with a high APR, you can transfer it to a card with zero per cent interest. This rate usually only lasts 12 to 24 months, so try to pay off the balance before then.
Home equity lines of credit
If you have enough equity in your home, you can borrow money from the bank using your house as collateral. Home equity lines of credit have lower interest rates than personal loans and better terms because it’s considered a secured loan, unlike a personal loan.
Marketplace loans are still relatively new to most borrowers, but they usually have lower interest rates than of personal loans. Terms can last as long as five years, and lenders offer good amount.
In some cases, personal loans are the best financial option. The key is to make sure you are getting the best rates and terms available. If a personal loan is still your best option, you can find a list of approved lenders. Go through each bank/company to see which has the best interest rates, terms, and customer service. Call them to see what rate you qualify for based on your credit score.
Mistakes to avoid when taking out a personal loan
Mistakes, big or small, you’ve probably made a few. But while they may help you grow, learn, or improve, financial mistakes almost always end up costing you money. That’s a costly way to learn a lesson.
From how you pay off your debts through to risky shares or investments, the financial world is littered with mistakes just waiting to happen. Even the seemingly simple act of applying for a loan or personal finance can be full of hurdles that could see you trip, fall, and lose more than a little spare change in the process.
So if you’re thinking of applying for a personal loan, spending a little time learning from others’ mistakes could save you from spending a whole lot of money in the long run.
According to nzcubaywide.co.nz, here are some mistakes to avoid when taking a personal loan
You don’t do your homework
There’s an awful lot of choice out there, so taking the first loan that comes your way is the first mistake you need to avoid. It’s hardly ever a good idea! Instead, ‘don your investigator cap, go digging, and do some research. You’ll quickly turn this overwhelming amount of choice back in your favour.
You settle for a high interest rate
Competitive fees, terms & conditions, and other extras are all well and good, but no matter how nice they sound, you should never settle for a high interest rate. There’s just no need! And yet it can be all too easy to lose sight of the rate you’re actually going to end up paying.
You ignore your credit score
It’s true! Your credit score can have an impact on your loan application. At best this will affect your chances of achieving a low finance rate, and at worst could see your loan application being rejected outright.
Some financial institutions do offer finance for people with bad credit, but it’s still a good idea to check your credit score first. You can do this quickly and easily online, and get the information you need to take action.
You forget to make repayments on time
The loan process doesn’t end once you’ve been given the tick of approval. At some point, you’re going to need to pay the money back. This might sound simple, but you’ll be surprised at just how easy it is to forget.
You don’t consider your budget
What are you planning on using this money for? Paying off medical bills? Maybe repaying those nagging debts? A loan may offer you exciting possibilities or help you out of a rough financial situation, but it also leaves you with an outstanding debt and interest to repay.
It can be all too easy to get caught up in the loan pre-approval process, and find that you haven’t asked – or answered – the most important question of all: will you be able to repay it?
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