Whether you’re facing some unexpected expenses, want to make a big purchase but don’t have the immediate cash, are consolidating debt, or going on holiday – a personal loan can be an effective and efficient way of obtaining the funds you need.
However, to ensure you get the best possible loan for your current situation, there are some common mistakes you need to avoid:
1) Borrowing Too Much
When you go to a lender’s website and see the amounts you can borrow, it can be awfully tempting to ask for more than you really need. It’s fun to daydream and go through what-if scenarios, but what if you borrow too much and can’t pay it back?
The answer is you could wreck your credit score and face the wrath of collection agencies.
Borrow only what you need and can afford, even if the lender is offering more.
2) Failing to Read the Terms and Conditions
A loan contract is a legal document and as soon as you sign it or go through the online process of accepting an offer, there’s no turning back – pleading ignorance because you failed to read through everything is not going to stop interest payments or collection proceedings.
The most important things to look out for are any fees on top of the usual interest, how much the loan will cost you in total, the repayment schedule, and the repercussions of late payments.
3) Not Accounting for Interest
Remember, borrowing £3,000 doesn’t mean you only repay £3,000. Interest will be charged on top of the principal amount as an Annual Percentage Rate (APR), i.e. the percentage of the principal that you would pay if the loan was outstanding for a year. Using this you can calculate the cost of any loan term.
That being said, usually the lender will make it clear how much the loan will cost you, but double check and remember to account for this before making your decision.
4) Not Choosing the Optimum Loan Term
The longer the loan term the smaller the installments and (to a degree) the more you can borrow, because the easier it is to manage. But remember, the longer the loan is outstanding the more you pay in interest overall.
You will need to find a happy medium and not necessarily go with the term the lender first offers. The wisest option is to borrow only what you need, for the shortest term that you can realistically manage.
5) Not Budgeting For Repayments
At a glance, you may think you can easily make repayments, but don’t forget to properly include them in your monthly or weekly budget. There’s nothing worse than coming to the repayment date and realizing you spent the money on something else.
6) Providing Misleading Information on Your Application
It can be tempting to lie on loan applications in order to borrow more. This can backfire for a number of reasons, not least because lying in this manner is fraud.
You could have your application rejected because the information doesn’t match public records (and you won’t necessarily be told this), you may be asked to provide further documentation (which you can’t because you lied) which is just a waste of your time, or if you do manage to inflate your income or mislead the lender in some other way – borrowing too much may just get you stuck in debt.
7) Assuming You Have to Be Employed
There are loans available for all kinds of situations, don’t assume you have to have the best credit score or be employed to find something that suits you. UKLoanCity, for example, is one of the established websites that provide loans for people who are unemployed.
8) Not Shopping Around
If you want a personal loan don’t just go to your bank or the first website you find. Every lender has different policies and you’re sure to get a much better deal if you shop around.
Don’t just apply willy-nilly though, as this can affect your credit score. Either go the pre-approved route, use a loan eligibility checker to see which you are most likely to be approved for, or use a loan matching service that uses one form for multiple lenders.
A financial planner From San Jose said, Applying for a personal loan with many different lenders in a short amount of time will have a negative effect on your credit score, as it gives the impression that you’re desperate and that you are being rejected for whatever reason.
As noted above, use the various tools available to find loans and check eligibility without applying direct.
10) Leaving Repayments Up To Your Memory
Most lenders will attempt to take repayments by direct debit, which means you don’t have to remember to make the payment yourself each time. However, if you’re relying on funds coming from different accounts don’t leave these transfers to your memory, set up a standing order so you know the money is there.
If your finances are a little more irregular, at least set a notification on your phone to remind you to get everything in order each month.
Now that you know what to avoid, you should be able to get the most out of your loan. Got any other common mistakes or personal loan tips? Let us know in the comments below!