Personal Loan: 8 Dangerous Traps Your Need to Avoid
Personal loans are something that you usually take because you need cash for an emergency. It’s not something that people do on the regular. However, it’s very useful when you need some sort of financial support.
If you can pay off your personal loans, then you should be able to improve your credit score as well. However, some things will make it hard for you to pay them off. In the end, you might be worse off than you were before.
With that said, below are some of the things that you want to make sure you avoid so that you don’t end up being burdened by the personal loan that you applied for.
Origination fee
One of the things that will be important for you to think about when taking out a personal loan is the origination fee. The origination fee is basically the processing fee that a lender assigns and charges upfront for processing a new loan.
The rate of the origination fee will be different between each person, and it can depend on how eligible you are for a personal loan most of the time. The processing fee is a particular rate, so it may be more crippling if you are taking out a huge loan.
Make sure you’re aware of that so that you aren’t shocked by the huge processing fee of your loan.
High-interest rates
Another thing to look out for is the interest rates that will be compounded on your personal loans. Interest rates are much like the origination fee in that it differs from lender to lender. Thus, it is a good idea to shop around and see which ones offer the lowest interest rates for you.
Of course, as usual, having a better credit score means that you also are likely going to have lower interest rates on your loan. Usually, interest rates for personal loans aren’t higher than the interest rates on credit cards, so that’s a good indicator to look out for.
Application fees and other up-front fees
Some dubious lenders will ask for application fees, or additional up-front charges that you have to pay for that doesn’t offer a guarantee that they’re going to lend you the money. If a lender asks you to pay these fees for additional services rendered, then you should be suspicious.
Unless there is a written agreement or guarantee that you’re going to be approved for the loan, then you shouldn’t give them any of that money. Having a loan agreement doesn’t only protect the lender, but it also protects you. Otherwise, if you provide them with the money, then you might never hear from them again.
Disbursement fee
When any of the money is handed to you for the personal fee that you took out, then don’t be surprised if there is a disbursement fee. The disbursement fee is something that you pay the banks every time you get a portion of the loan given to you.
Every time the bank or the lender gives you money, then they are likely going to take a small percentage for the disbursement fee. Take note of that so that you aren’t surprised or are wondering what the disbursement fee is.
Penalty for late payment
According to the Finance District, one of the things that you should always be vigilant of when you take out the personal loan is the late payment penalty. You should make sure that by the end of the deadlines, you have adequate cash or payment so that you don’t add on to the money that you owe.
Thus, you should make sure that you pay the loan on time. Otherwise, you might have to take on more debts than you originally were prepared for.
Pre-compute interest or pre-payment penalty
The loan business is still a business. So if you think that you can pay your loan off at an earlier date, then you have to be aware of the pre-payment penalty. After all, lenders want to get all that they can get from their interest rate.
If you think you have the ability to pay off your loan earlier than the deadline, then ask the lender if they have pre-payment penalties in place.
Loan insurance
Some lenders may say that you are required to have loan insurance on your loan or else they won’t approve you taking out a loan with them. If this is the case for you, then it’s time to look for other lenders. You are never required to get loan insurance, and you shouldn’t be forced to have it to be able to apply for a personal loan.
Hidden fees and costs
You should make sure that all your fees are in a written agreement. Thus, when you’re signing on to a loan, you aren’t surprised by any hidden fees.
If you find that a lender has added on hidden costs, then you should make sure to report that to the appropriate authorities because this is malpractice.
Wrap up
Taking out a personal loan should help you overcome a current problem and not add problems for you to deal with. However, if you’re not careful, that can end up being the case for you. Hopefully, knowing what to be cautious of can help you be more mindful of what you’re getting yourself into.
As long as you pay your dues on time and prepare yourself for the responsibility of taking out a personal loan, then you should be relatively prepared for that.