Personal loans are an useful financial tool to solve some money problems you might have: debt, business investment, medical bills, an emergency you cannot pay for with your regular emergency fund etc.
Since a personal loan is still a loan, there are some mistakes you should avoid, so that you don’t end up broke.
Personal loans mistake #1: Getting a loan for the wrong reasons
I personally consider ALL debt to be ‘bad‘, even if I understand it’s not all black & white.
In some cases, taking a loan might boost your business and allow you to earn more, but I try to stay away from debt as much as possible, especially after being in this situation 2 times already.
If you are struggling with some medical emergencies, or something similarly serious, getting a personal loan is not a bad idea.
But don’t get in debt for a new gadget, a bigger car than you can afford or a luxurious vacation.
Debt IS SERIOUS, especially when you don’t have a big income, so choose wisely.
Personal loans mistake #2: Getting a loan, even if you could borrow money from someone close
If you struggle financially, don’t be too proud to ask for support.
You probably have a family and some friends, maybe they could lend you the money.
If it’s not a lot of money and you have a great reputation of someone who’s always paying on time, you’ll surely find someone willing to lend a hand.
Borrowing money from someone close is better than getting a personal loan, since your family member / friend will probably not ask you for interest, late fees and all the jazz.
So, just ask.
If no one can help you out, then go shopping for a loan. Which brings us to mistake no.3:
Personal loans mistake #3: Not shopping around
Back in the day, when I got my car loan, I never cared to get offers from more car dealers. I just got my eyes on a certain car and agreed with all their terms. As you can guess, it wasn’t the best deal available.
Come to think of it, it was a very bad deal.
Instead of taking the loan with the car dealer, I could have opted for a personal loan with a local bank. This would have saved me a lot of money in car insurance and also would have given me a way better deal.
So, if you need to take a loan, do shop around. Find more companies, compare APRs (Annual Percentage Rates) and then decide.
Personal loans mistake #4: Not reading the fine print
Few months ago I noticed a huge street banner that was advertising a new credit card a bank was offering. As you could guess, in their ad, they’d promote one of the advantages you’d get (in this case a small monthly payment), but were not disclosing the HUGE APR you’d have to incur.
The total cost for said credit was sooo huge that it was actually one of the worst offerings on the market back then.
Another exemple … as I was waiting for a bank clerk to make some changes in my account (new name, after I got married), I noticed a flyer promoting some free miles credit card.
After reading the fine print I came to the conclusion that those few miles you’d get are so expensive, that you’re better off without the card.
Lesson? Always read the fine print. Find out exactly your balance, monthly payments, APS, any late fees, overdraft fees – everything. Only after you’ve done your homework are you ready to take on a personal loan and not be ripped off.
Personal loans mistake #5: Not checking your credit score
A bad credit history will cost you a lot. So, before you chase a personal loan, why not try to repair your credit score? This will give you access to some way better deals.
There are credit companies that accept people with low credit scores, but you won’t get get their best personal loan conditions.
Personal loans mistake #6: Lying on your income or credit score
Years ago someone I know made a deal with the company to ‘inflate‘ his salary. This was done easily: the company declared a bigger wage and said person paid the extra taxes. After few months, this allowed him to get a big personal loan to buy a small studio apartment.
One year after he lost his job and couldn’t make the huge payments anymore, so he had to leave the country and find a job to pay off his debt.
Never lie on your income / credit score. Get the deal you can get with your current situation and make those monthly payments. Don’t get into a big financial problem just to be able to borrow more, since this means you’ll pay back more.
Do you have other persona loan mistakes to ad? Have you made any of these?