7 mistakes to avoid when getting a personal loan
Every year, thousands of New Zealanders take out personal loans to finance expensive investments, pay outstanding payments, to pay for trips overseas and for educational purposes. What these people often struggle to do, however, is pay these loans back, putting themselves in a sticky situation.
You may ask; what actually is a personal loan? A personal loan allows you to borrow a lump sum of money, often for a particular purpose or need.
You can pay these loans through scheduling regular repayments where you also have to pay an interest cost that is based on the amount you are borrowing and the rate the loan provider is offering you.
Taking out personal loans can always be a risky move. On one hand, you may need the loan to be able to finance some of your activities, but on the other hand you’ll be incurring debt that you may find hard to pay back.
Personal loans can come in handy for various things, such as paying for unexpected costs and financing activities. They’re generally so appealing because they offer low interest rates for consumers with good credit ratings.
However, when the right steps are not taken during the period of the loan, or mistakes are made, this is when serious problems can occur.
Not checking your credit rating
Often to be eligible to take out a personal loan, you need a good credit rating. Credit ratings are based on your previous borrowings and your diligence on the repayments and gives banks an idea of your ability to pay back your loan.
A mistake people often make, is not just worsening their credit rating, but also not checking their credit rating before they apply for the loan. This could lead to your loan request being rejected, or the bank charging you a higher interest rate than it would be otherwise.
Checking your credit rating a while before you actually need the personal loan can give you the time you need to improve it to a suitable score.
Not making your loan repayments on time
This is one you really want to avoid. As mentioned above, your credit rating is very important and can affect things like your borrowing ability or renting ability in the future, as banks and landlords will often not accept people with a poor credit rating. Not making your loan repayments on time can substantially reduce this rating.
You should consider making automatic payments with your bank account so that not only will you not have to remember to make the payments, but it also forces you to pay it, if you do have the money sitting in your account.
Choosing the wrong loan deal
It’s easy to just choose a loan deal based on a referral or a short procedure, but the repercussions of doing this might make you think it’s worthwhile to check other options. It might also be tempting to just only apply at your local bank or the bank you usually operate with.
However doing this, means that you might not necessarily be getting the best rates on your loan. While it could take more time to check rates from other banks too, it could help you lower your debt burden.
You can also use this personal loan calculator to help you find the best deal for you. It takes into account the amount you want to borrow, the length of the loan and your desired repayment period to give you loan deals with the best personal loan rates available.
Taking out a loan for the wrong purpose
Before taking out a loan, you should make sure that you’re getting the loan for a suitable purpose. Often people take out loans with the intention of earning more money than they originally had, so that they can pay off the loan with ease.
If your loan is going to be used to invest in something that will get you a higher return, then your risk may be lower, but you should ensure that your investment will give you a good return. On the other hand, if you take out a personal loan without some sort of income stream coming in, then you might want to reconsider taking out the loan.
Borrowing money that you can’t pay back
It seems like a no brainer, but borrowing money that you know you will find difficult to pay back is not a good idea. However, an astonishing amount of people do this, leaving them in a terrible pit of debt for which they have no payment solution for.
Before taking out the loan, you should evaluate your income stream and your monthly payments from your bank statements. From there you can get a good idea about whether you’ll have enough money left over each month to pay the interest from the loan.
You then also want to consider whether in the future you’ll have enough money to pay off what you borrowed. Borrowing less money is also another option, so that you won’t put such a big burden on yourself for the repayments.
Not reading the fine print
Often when terms and conditions and other lengthy contract details are put in front of us, we choose to ignore them and sign or agree to the conditions, simply because we cannot be bothered. With things like Facebook accounts or gaming accounts it’s fine, but doing this with personal loans however, can get you into some trouble.
Ideally, you should not only have a skim over the terms, but instead you should put some time aside just to look over them in some detail so you fully understand what you are agreeing to. Carelessness and missing out small details in the contract can lead to you paying exorbitant fees in.the long run.
Contracts are not designed for an enjoyable read, that’s for sure, but it’s important to remember that each page you sign provides legal proof that you accept all the terms that are written in the contract. Whether you read those terms are entirely up to you.
You should be aware of the different interest rates and penalties for late payments before signing and you should make sure to read the hidden clauses of the contract too. You can even ask for an extra copy of the contract to take home as well so that you can spend time reading it rather than feeling pressured to read it fast.
Lying on your application
While certain circumstances and situations can help you get a personal loan at a good rate, you should never overstate your income on your application. This is because while it may seem more desirable to the loan provider, if they find out you have lied, they can void the contract. It’s also illegal to do this.
Ultimately it’s just not worth it to lie about it due to the severe consequences that could come of it. A good way to look at it is, if the bank denies your application for a loan, it might mean you shouldn’t get one in the first place since they think that it’s too risky.
Personal loans are becoming the fastest growing debt category in America and it’s easy to see why with the amount of mistakes people make when they take out personal loans. All of these mistakes can be easily avoided however if you are vigilant and aware not only during the term of the loan, but before and afterwards too.