Smaller personal loans can give you the breathing room you need to finance a large purchase over time, or to pay for home renovations, for example.
However, taking out a loan isn’t something that you should jump into without thinking.
Taking out a loan is a big responsibility, so it’s important to be prepared. Keep reading to learn about some mistakes to avid when taking out a loan.
Mistakes can cause you long term headaches. They can also result in your loan costing a lot more than you initially expected.
Here are the key mistakes that you need to avoid when taking out a loan, and tips for making sure you get it right.
Listen to Your Head, Not Your Heart
What is your loan for?
That’s a vital question you need to be asking yourself well before you apply.
If you’re asking for a loan because you need the money urgently for something important, then it’s likely to be a sensible choice.
If you’re applying for a loan because you want something, but don’t need it, you may be better off saving up to make the purchase instead.
However, it is easy to be tempted to borrow enough for your needs, and then a little extra on top for something nice.
While this won’t have terrible consequences for everyone, remember that your loan repayments will eat into your normal household budget. Make sure you’ve worked through all the numbers to ensure you can afford the loan before you apply.
If you’re consolidating large personal debts, for example, you’re likely to end up paying much more over time for the sake of the ‘extra’ part of your loan. Factor this in when deciding how much to borrow.
For relatively small short term loans, this is less of a concern, and it’s easier to get hold of a smaller loan in any case. But just bear in mind you have to repay the loan at the end of the day, however much has been lent to you.
Either way, you almost definitely shouldn’t be using a bank loan to cover frivolous costs, like non-essential clothes or other treats for yourself.
Think About How Much You’re Borrowing
It’s sometimes a good idea to borrow a small amount beyond your needs if you’re having home improvements done, or paying for other large projects, as the budget might shift if any problems arise.
This will save you having to scramble around for extra cash at short notice.
It’ll also prevent you from taking out another personal loan. Not only is it a hassle to take out two loans, but taking out a second loan in a short space of time won’t look good to future lenders.
But if whatever you’re borrowing for has a fixed price, borrow as much as you need and no more.
On a similar note, don’t overextend your financial ability when taking out a loan. If you can only afford to repay $100 a month, don’t take out a loan where you’ll have to pay $150 each month.
Lenders have some responsibility in this matter too, as they should be assessing applications to prevent situations like this. But it does happen, and you’ve got to be realistic when considering your ability to repay the loan.
Finding the Best Interest Rates
Shop around for low-interest rates if you’re thinking of taking out a loan.
This can make a massive difference to how much the loan costs you. For example, a short-term loan charging 1% daily on the balance will be much cheaper than one charging 5% daily.
It might not sound like a big difference, but if you’re paying back over a few months it can really make a change to your finances.
So make sure you’re getting the lowest rate you qualify for. The rate you can get will likely depend at least partially on your credit report.
A credit report is a record of all your banking and borrowing history. Lenders use this to assess whether you’re a financially sound person to lend to
Factor in the Fees
Remember that when you’re looking for a loan, it’s not just the interest rate that will affect the amount you pay.
Some loans will come with a set-up or ‘establishment’ fee, and some may charge you for paying the loan back earlier than originally agreed.
There may also be fees if you miss a payment – see more about that below.
If you’re unclear on what fees might be charged, ask your lender to list them for you. Any reputable lender will be pleased to spell out potential extra costs for you so that you can navigate around these if you’d like to.
Don’t Miss Payments
Once you’ve got a loan, the most important thing you need to do is always make your payments on time.
If you don’t, it’s likely you’ll have to pay extra penalty fees. These might be added to the loan and you’ll then pay interest on these too.
Missed payments might show up later on your credit report, which will make it harder for you to get credit in the future. Or you may be only offered very expensive rates.
This can affect the price and availability of loans for a long time, so make sure you always keep up with payments.
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Thinking About Taking Out a Loan?
We hope this guide will help you to dodge the potential pitfalls when taking out a loan. Ask your lender if you’re unsure about anything else.
There’s a lot to think about, but the most important thing is keeping on top of your payments.
If you have taken out a loan but are struggling to pay it back, get in touch with your lender. They’ll be happy to work with you to find a sensible solution for everybody.
If you’re ready to move on to applying for a short-term loan, we can arrange quick and easy loans that fit your needs and budget.
Apply now to see how much we could lend you to cover unexpected bills or a shortfall of cash in your pocket.