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The world of personal finance can be a tough one to navigate, especially because there are so many places you can go awry and get lost in the woods. In fact, some mistakes made while taking out a loan could have devastating consequences for your financial security for years afterward.
That’s why we’ve gathered a list of 7 mistakes to avoid when you’re looking for a personal loan of your own.
Not Realizing that Monthly Payments are Just the Tip of the Iceberg
It’s absolutely true that looking at the monthly payments required for the loans you’re comparing offers a quick and dirty metric for figuring out the cost of your loan. But the truth is that you can’t just look at monthly payment amounts, as they don’t tell the whole story. First, monthly payments don’t cover all the other costs of getting a loan. Interest rates, late fees, application fees, and origination fees all play a role as well. Some lenders might try to make their fees look more palatable by offering a low monthly payment, but the end result is you’re locked in for longer (and end up paying more in the long run).
Additionally, your monthly payment doesn’t tell the story of the financial institution from which you’re borrowing. It’s just as important to know who those payments are going to as it is knowing you’re making those monthly payments on time. Always choose a reputable lender; you can help figure out if your lender is on the up-and-up by checking customer reviews, looking into their history, and seeing if they offer any additional services, like free customer support or other resources.
Not Telling the Truth on Your Loan Application
If there’s one absolute ironclad rule about looking for a loan, it’s this: always tell the truth on your loan application. Sure, you might think that stretching the truth about whether you work full-time versus part-time seems to be a harmless difference, especially if you need the loan and you want to increase your chances of getting approved by presenting the best version of yourself, but the truth is that this is a terrible idea.
Why is it so bad? Well, the government takes financial fraud very, very seriously. Even telling a simple, seemingly “harmless” fib can expose you to some serious legal liability. The last thing you want to end up is being prosecuted for fraud and end up doing some time in jail. Just do yourself a favor and keep to the truth on your loan application.
Not Choosing Your Borrowing Product With Care
A personal loan is great for borrowing, but it’s not the only product out there. In fact, depending on what type of lending you need, you might be better served with a product that isn’t a personal loan. Examples of these include things like student loans, as a private student loan refinance often results with lower rates and larger savings.
If you’re consolidating credit card debt, this is another place where a personal loan might not be the best choice. A 0% APR credit card might cost you less in the long run and provide you more flexibility than a personal loan product. Make sure you always check your other options when applicable so that you don’t get locked into a personal loan that, while probably a pretty good deal, isn’t quite as good as you could have gotten otherwise.
Not Spending Your Loan Wisely
Low-cost personal loans are a more affordable choice for a luxury purchase or a vacation than putting it on your credit card, but you’re still not making the best decision. Financing non-essential expenses in this way has the potential for being a very, very bad idea, especially if you end up not being able to keep up with loan repayments.
If you are considering a personal loan, there are, of course, excellent ways to use it. Covering emergency expenses that you can’t afford out of pocket, like replacing a broken appliance or for major repairs on your car, is an excellent reason. Consolidating debt is another, as this can often result in savings when you take interest rates into account.
Not Controlling Your Spending
Speaking of debt consolidation, personal lending is a great way to pay down that debt. However, if you end up not changing the spending habits that got you into the mess in the first place, you can end up in a worse financial position than you were in to begin with!
You don’t want to end up with both a personal loan to repay and additional debt on a credit card that you just used a loan to zero out. Remember, a personal loan is best used to get your spending under control, not to let it run rampant even farther.
Not Looking Into a Cosigner
If you’re having trouble getting a loan on your own, you may want to consider looking for a cosigner. There are plenty of advantages and disadvantages for both you and your cosigner. Sure, you can more easily qualify for a personal loan with a good interest rate, but your cosigner is on the hook if you can’t make payments. Plus, both your credit and theirs are affected if you make late payments or miss them completely.
Using a cosigner isn’t for everyone, of course. You need to have someone in your life who is both financially stable and willing to stick your neck out for you in a really substantial way. If you do have someone like that at your disposal, you better make sure you’re not going to let them down if they sign on the dotted line on your behalf.
Not Borrowing an Appropriate Amount
It’s tempting to take the money and run, so to speak, and worry about repayment later. Do your best to avoid that temptation and borrow just the amount you need. This makes it easier for you to repay that loan in the long run. Taking more than you need, especially when your lender offers you a high loan amount, can be a bad idea indeed.
RELATED: What to Know Before You Apply for a Personal Loan
Why is it so bad? Just because your lender is willing to lend you a specific amount doesn’t mean that you need to accept. You could easily end up biting off more than you could chew if you go too big, especially because the metrics that lenders use to determine if you’ll be able to repay that loan don’t take everything into account.