Personal Loans Guide: Pitfalls to Watch Out For

Credit cards may be the first solution to come to mind when you need to pay for something but don’t have enough money on hand. They are not only convenient to use, they can also provide you with instant cash when you are unable to make the ends meet.

But you need to realize: credit cards are not your only option.

In the financial market, you will find an array of financial products that can also be of assistance to you.

Take personal loans for example.

Personal loans are worth considering too. In many ways, they can be more convenient and economical than credit cards and can be better for your credit score. Compared to fixed-term personal loans, for instance, credit cards will can set you back more in terms of interest rate and you may end up trying to pay off your debt longer than you had originally planned.

Getting a personal loan

The process of borrowing money through personal loan is pretty simple and straightfoward.

Shopping around and searching for the best loan rates is made easy thanks to Internet technology. You can easily find online tools that allow you to prequalify for a personal loan in under five minutes.

Once you qualify and your application is approved, you just need to agree with the loan terms.

Fixed term means your debt will be paid off after a fixed period of time (in most cases, that would be five years). The interest rate is fixed as well, so you can expect to pay the same amount monthly until your loan is completed. Typically, you also don’t have to worry about prepayment penalties, although it’s best to check and confirm this as some lenders do have prepayment penalties in place.

After you’ve accepted the terms of your personal loan, you can avail of the money via check or a direct transfer to your bank account.

Of course, certain lenders have requirements that you need to submit. Aside from filling out an online application form, you will also need to send valid identification documents, proof of income such as bank statements and pay stubs, and so on.

Pitfalls to watch out for

Personal loans have a tricky side so you need to tread carefully. The tricks are either hidden in contracts or may be shared to you by lenders looking to persuade you to spend more than you have to.

Some lenders may, at the end of their sales pitch, pressure you into availing of life insurance. As important as it is to protecting your family, life insurance is better availed separately than as an add-on policy. Unemployment insurance can be beneficial, but only if you feel like there’s a high chance you’ll lose your job in the following six to 12 months.

Pre-compute interest
You should steer clear of offers with pre-compute interest, as this will leave you paying a higher interest at the first few months or years. And if you happen to finish paying off the loan early, then you would have paid more in interest than what was indicated in the original quote.

Origination fee
Chances are you won’t be able to skip the origination fee, as this is included in most personal loan charges. But you can score a good deal by comparing the APR of a loan. The origination fee is built into the APR, and it is either deducted from the amount you loaned or disguised in the similar way as a prepayment penalty is.

Prepayment penalties
Some lenders charge prepayment penalties directly, so make sure you ask the lender about this first before you commit to anything.

Personal loans can be a great alternative to credit cards. To get the best rates and avoid unnecessary charges, however, you need to do your research, shop around and be wary of common traps.

You should also be very careful of lenders that ask for upfront fees. Reputable financial institutions will not require you to make any upfront fees. Think about it, you are the one who needs the money, why will you be the one to pay? It’s imperative that you recognize the red flags so you do not end up becoming a victim of any scam.