Some so-called financial advisors will tell you never to take out a personal loan. But while taking out a personal loan can be a poor choice if you're not in the position to pay it back, sometimes you really need money — and a personal loan is the most accessible way to obtain that money. There are ways to use personal loans responsibly. Here are five tips to follow to ensure you're being smart and responsible when taking out a personal loan.
1. Compare rates.
Rates on personal loans vary wildly — perhaps more so than rates on any other type of loan. As such, you will always want to get a few different numbers from a few different banks before you agree to a loan. A good strategy is to apply to at least one large commercial bank, one local credit union, and one online bank. The online bank or the credit union will often have a better rate, but commercial banks sometimes run promotions on personal loans, so you might be surprised.
2. Check for hidden fees.
There are plenty of honest lenders out there who are totally upfront about their loan fees. There are also some who will try to add additional fees in the fine print so you don't realize the loan will end up costing you more than just the interest rate. Common hidden fees include a fee for pre-payment of the loan or a lump sum fee due at one year. You really should be able to find a loan offered without any of these fees; doing so will save you a lot and give you more options, such as paying the loan off early to save on interest.
3. Check your credit report for accuracy first.
Personal loan rates are determined largely based on your credit score. If you have a credit score of 700, for instance, the bank will offer you a lower rate than if you were to have a credit score of 600. If you need a personal loan right away, you can't do much to change your credit score that fast. But you should at least check your credit report for accuracy. If there are debts on your credit report that are not your own, then you can contact the credit bureau and have them removed. Sometimes, this only takes a few days. Your credit score will shoot up afterward, so you'll be offered a better rate on the loan.
4. Make sure you can afford the payments.
When applying for loans, don't just consider how much you are taking out. Also, make sure you know exactly what the monthly payments will be for the amount you are borrowing and that you can afford those amounts. If you do not think you can afford the monthly payments, one option is to extend the loan period out a bit more, which will lower the payments. For example, if you need $10,000 and that results in $400 payments due each month for 3 years, you could instead borrow $10,000 paid back over 5 years and owe just $280 a month. A loan calculator can help you figure this all out.
You do not want to fall behind on payments for your personal loan, because then you'll owe late fees, making the loan even more expensive overall.
In a perfect world, you would never have to take out a personal loan — but this is not a perfect world. If you need money fast, there are ways to use personal loans wisely and to your advantage. Just make sure you shop around, know exactly what you will owe, and make payments a priority.
Learn more by reaching out to local centers such as Frontier Community Credit Union.Share