3 pitfalls you may encounter with a personal loan
Keep them in mind if you need to borrow money.
- A personal loan can be a convenient way to borrow money.
- Be careful when taking out a personal loan, even if qualifying seems like a breeze.
- You don’t want to borrow more than you need or end up with a high interest rate.
Lenders who grant personal loans do not do so randomly. On the contrary, you must prove that you are a reputable borrower in order to qualify for a personal loan.
But if you have a very good credit rating, you may find it quite easy to get approved for a personal loan. You might also be surprised at the amount of money you can borrow.
But while personal loans are quite convenient (they allow you to borrow money for any purpose) and they tend to charge competitive interest rates compared to other mortgage options. borrowing, like credit cards, there are some pitfalls you might fall into when getting one. Here are some specific ones to try to avoid.
1. Having to borrow more than necessary
If your credit is good, you may be able to borrow a large sum of money through a personal loan. And if you’re able to get a relatively low interest rate on that loan, you might be tempted to borrow more than you need. But it could end up being a dangerous move.
Although a personal loan can be a fairly affordable way to borrow money, it is debt nonetheless. And the more you accumulate, the harder it can be to keep up.
Additionally, personal loans may not charge the same exorbitant interest rates as credit cards, but they still charge interest. So if you only need to borrow $10,000, don’t withdraw $15,000 because you’re not being charged an arm and a leg in interest. That extra $5,000 could still cost you dearly.
2. Having borrow more than necessary
To set up a personal loan, your lender must go through the process of verifying your finances, creating loan documents, and engaging in other time-consuming administrative tasks. So, personal loans usually come with a minimum borrowing requirement which can vary from lender to lender. But this could, in turn, force you to borrow more money than necessary.
Let’s say the lender you want to work with has a minimum loan amount of $5,000 for a personal loan. If you only need to borrow $4,000, you can still go ahead with this loan, while racking up additional debt.
3. Getting stuck with a higher interest rate due to a recent credit score hit
Strong credit could be to your advantage when it comes to a personal loan. But if your credit score has recently dropped, you could end up with a not-so-favorable interest rate on the amount you borrow.
If this is the situation you find yourself in and you own a home, you may want to consider a home equity loan instead. Home equity lenders look at credit scores, but the most important factor they look at is the amount of equity in your home. If that number is high, a lender may be willing to ignore a lower credit score and offer you a competitive borrowing rate.
When you need cash on the fly, a personal loan can be a great solution. Just do what you can to avoid these pitfalls when you pull one out.
The Ascent’s Best Personal Loans for 2022
Our team of independent experts have pored over the fine print to find the select personal loans that offer competitive rates and low fees. Start by reviewing The Ascent’s best personal loans for 2022.