10 things you should consider before taking out a personal loan
Unlike a mortgage or loan for a car, a personal loan is more flexible, which offers many options for you, for instance, if you are without a salary. With it, you can buy a house or a car – as well as use it to cover your cell phone bills and/or go shopping.
If you are considering a personal loan to simplify your payments and potentially get rid of a debt that you purchased, there are 10 things you should know before taking this big financial step.
In addition, personal loans may also be easier to obtain than other types of loans, however, this does not mean that it is best for your financial health. That is why we bring you this article with the 10 important aspects to consider before obtaining a personal loan.
1. Comparing Financial Entities can lead to better rates
As with any other financial product, when it comes to applying for personal loans, it is worth comparing financial institutions over the Internet, so that it is possible to compare interest rates and other important characteristics of the loan.
The AER (annual equivalent rate) offers the true cost of a personal loan, but you also have to take into account any other charges that may be incurred and when you have to make the payments.
Your bank may say that it offers better rates to its clients with a current account, but it is possible to find cheaper loans available yourself, in other banking and financial entities. This is possible using a personal loan calculator.
2. Check the Fine Print
Before applying for a personal loan, check the fine print to see if you can meet the requirements they ask for. To apply for personal loans in some banking entities, it is necessary to contract a checking account, a credit card, and other financial products, so that you can link with them as much as possible.
Other financial entities are not going to ask for these requirements, but they can offer you better conditions if you do.
The fine print specifies the boundaries, for instance, the do’s and don’ts of the contract that you sign with a contractor or a company. The contract terms or the fine print is likewise given to you in the form of a paper document or in a digitized format.
3. Think About the Early Repayment Costs
It may seem unlikely at the time of requesting a personal loan, but do not forget that it is possible that you can repay your debt in advance. Many financial institutions will apply a fee for early repayment, so it’s a good idea to check how much it could cost you before applying for a personal loan.
If you think there is a good chance that you will have to liquidate your loan ahead of time, it may be worth looking for loans without early repayment fees.
Moreover, there are personal loans that offer the possibility of returning the money in advance, saving interest, since you only pay for the time you have the money in your possession, as well as a line of credit.
4. Payment Protection Insurance (PPI)
Payment protection insurance has had little acceptance by customers of loan debt because it is a financial product that increases the cost of the loan to request, but it can be a useful product for some people.
They are designed to cover payments on your loan rates or credit cards if you are not able to meet payment obligations due to illness or unemployment.
If you decide that you need this type of protection, it is vital to check the financial ones that offer it cheaper and even consider the possibility of contracting it with an independent provider. It is also highly advisable to make sure you fully understand what is or is not covered before making the contract.
5. Verifying Your Credit Rating is key
If you are going to apply for personal loans at a bank, it is crucial that you check your credit rating first. The lenders check, in addition to the purpose of the loan and your income, the history of loans used and if you are in a list of defaulters.
So if your credit rating is not good, it is possible that your loan will be rejected or the lender will charge you higher interest rates.
Many personal loans are obtained merely on the basis of the credit profile, instead of presenting a business plan or offering guarantees such as a house or a car. Such loans are also known as signature loans because the only real guarantee of payment is your signature on the loan agreement papers.
However, your credit score weighs on whether you are approved or accepted for conventional personal loans.
Moreover, some lenders, for instance, savings and credit cooperatives, review your entire credit profile instead of just the credit score you may have, which can make it easier or harder to be approved to proceed.
Take into account then if you have a profile and a qualification suitable to obtain a personal loan, as the lender may not grant you the loan if they don’t believe you are suitable.
6. Apply For a Personal Loan through Credit Card
Before applying for personal loans, consider other forms of credit. Credit cards can be a more expensive form of financing, but they have the advantage that they do not leave traces in your credit history if you return the money within the established period.
In addition, you can get urgent financing without having to make an application. However, if you do not think you can repay the money in the period they offer, it may be better to apply for longer-term personal loans.
7. Watch out for scams
Many personal loans without a salary do not require guarantees. But “borrowing” from a pawn shop requires that you give up your personal property in exchange for the loan.
Therefore, take into consideration what your financial advisor or someone who knows about the subject tells you.
It is because when you read more personal loan options, the number of scams that you are exposed to will increase and it is very easy for scammers to convince you to fall into a trap.
So, keep in mind that if a bank does not care about checking your credit history or does not give you more detail about the repayment periods, you could be dealing with a scammer and you should tread lightly and be cautious about your dealings with that party.
8. Borrowing More Can Mean Lower Interest Rates
In general, the larger the loan, the lower the interest rates they offer. Due to the way in which some financial entities manage the prices of their personal loans, there are times when you can actually save money by requesting larger loans.
This becomes more visible in the case of requesting a type of loan that offers greater amounts of money than another, such as mini-credits, since in many cases it is more beneficial to apply for a different loan with a larger amount of money. As far as mini-credit is concerned, you will pay less interest and you can enjoy the money for longer.
Keeping this in mind, you should still be aware that borrowing a large sum of money means that you will have more to pay back and more months of regular interest payments, despite the lower rates.
9. Do Not Apply For Too Many Personal Loans
When you apply for personal loans, most financial institutions will leave a mark on your credit history that lenders can check before giving you the approval. Having a large number of applications in your registry can make you look desperate or in financial difficulties.
As a result of this, the lenders can see you with more risk, so they are less likely to approve the application for the loans you request.
People often need loans for emergency situations, so they might apply at multiple banks. This is so that they can accept the better loan offer that comes to them faster. You need to avoid such practices because it can lead to loan rejection.
10. Analyze the Risks
Secured personal loans are cheaper than unsecured loans, but you run the risk of losing the guarantee if you do not keep payments up to date.
So, it is not advisable to request them unless you are 100% sure that you can meet your payments, otherwise you may lose your collateral. This type of loan basically has less risk for the lenders but is more risky for the borrowers.
Based on the credit score, a credit union or bank may require a co-signer before they approve you for a loan.
Likewise, this is true if your credit history is low or insufficient and if you are not providing security or collateral. The co-signer option arises because this person could answer for your loan in case you cannot pay it.
In many cases, personal loans should not be something people are frightened of getting, as they can be extremely useful to help finance activities that can help earn more money later, get people out of tough situations and to help people consolidate their debt.
There are just certain things that should be considered before applying for a personal loan, and things to keep in mind during the term of the loan, in order for you to not get into any trouble.
If you are interested in taking out a personal loan, Glimp offers a comparison tool for personal loans that compares different deals based on the amount you are wanting to borrow, the term you’re wanting to borrow it for and your desired payment schedule.
This makes it super easy for you to choose a loan deal that you want without even having to leave your computer!