Loans are useful in different situations. Whether you have a gap in your monthly budget or a big purchase to make, there are financing options you can now consider as the right solution. In the case of personal loans, you can also deal with financial emergencies and get the money you need quickly.
There are even more personal loans to choose from, especially with lenders now competing in a more saturated market. This means you can find better deals, more features and services, and of course faster application process; these are the features you can benefit from.
Just because you can take out a personal loan easily, doesn’t mean you should use the loan in every situation. There are some common mistakes many people still make when it comes to personal loans. Here are some of the mistakes you want to avoid when taking out a personal loan for yourself.
Comparing the Monthly Instalments
Many personal loans are designed to be affordable. They have low monthly instalment amounts and come with flexible loan term that you can adjust accordingly. If you want to keep the monthly repayment amount low, for example, you can extend the loan over a longer period of time.
However, you should never compare personal loans based on their monthly repayment amounts alone. The amount you pay every month does not always represent the cost of using the loan in a fair way. In fact, it is not always possible to tell how much of the monthly repayment gets allocated towards the loan’s principal amount.
Keep in mind that there are other cost elements added to the monthly repayment amount. Aside from the interest, you also have to deal with fees every time you make a payment towards the loan. If you do want to compare personal loans, review the total cost of using the loan objectively.
Not Considering the Costs
We usually take the interest rate as the cost of using a personal loan. This is why many still compare personal loans based on their interest rate. While there is nothing wrong with reviewing the interest rates of personal loans you are comparing, the rates still don’t tell the whole story.
Aside from the monthly fees, there are also fees and charges that you have to deal with when taking out the loan. Some lenders charge a withdrawal or transfer fee when they transfer you the money. Others have additional charges such as origination fee, credit report fee, processing fee, and even prepayment penalty if you decide to settle the loan early.
These cost elements need to be considered thoroughly if you are serious about getting the best deal on your personal loan. They may seem small at first, but they can quickly become substantial when you start adding them up.
Accepting the First Deal You Come Across
Similar to other big decisions, you should never go for the first personal loan you come across. While we’ve been talking about the different factors to consider when comparing loans, many still go for the first personal loan deal they find just so they can get the money they need quickly.
This is a big mistake to make in a market as competitive as it is today. Lenders are working harder to win your business and there are more deals and special offers than ever. Taking the time, even if it is only five minutes, means finding more deals to look into. Don’t be surprised to find personal loans with lower charges, more manageable terms, and lower interest rate in general.
While you are at it, try contacting the lender directly and asking for a better deal. Mention that you are comparing loans from multiple lenders and that you are trying to save on the cost of the loan. This will also land you a much better deal on the personal loan.
Borrowing More Than You Need
Just because you can take out a personal loan in a couple of hours, doesn’t mean you should. Just because you can now get loans of up to £500,000 from select lenders, doesn’t mean you should either. Loans are still liabilities that need to be repaid, which is why you must always measure your ability to repay the personal loan before deciding to apply for it.
Ideally, you want the loan repayment amount to take up no more than 30% of your monthly income. This will make the loan (or loans) easier to handle. You also have the option to repay the loan sooner and save on interest rate and other charges, as long as there is no prepayment penalty stopping you from doing so.
By avoiding these mistakes, you can utilize the wealth of financing options and personal loan deals available today and reap the most benefits from them. The better you are at avoiding these mistakes, the more valuable your next personal loan will be.