Most Common Mistakes to Avoid in Getting a Personal Loan

There are dozens of loan programs that are being offered by banks and finance corporations. There are loans specially-tailored for purchasing a brand new car, buying a house and lot, expanding your business or applying for a life insurance. Loans are helpful especially if we need extra funds to support our needs.

However, most loans are overly-specified. Before you get approved, you have to provide documents that would support your loan. Well, good thing there is a personal loan. From the name itself, it can be used for your personal uses.

Why Choose a Personal Loan?

Before you decide on what loan to apply, you must consider knowing what personal loan is and the benefits and advantages you can get if you get approved for this type of loan.

General Purpose

As mentioned earlier, it is for personal use. So, you can use the loan cash to any purpose – buying a car, renovating a home, starting a business or even to fund your next out-of-the-country vacation. Most loan programs have restrictions when it comes to use and purpose. Well, personal loans are made flexible for you to fit your special needs.

Lower Interest Rate

Most types of personal loans offer you a fixed interest rate. This means that you are required to pay the same interest rate within your term. Plus, the good news is that personal loans offer lower interest rates than most loan programs, especially credit card. For example, it is natural that you pay around 15% annual percentage rate (APR) on a credit card balance. However, in personal loans, you can qualify for an APR of about 6%, especially if you have a good credit rating.

Fixed Payment Terms

Personal loans require you to settle your loan within a fixed payment term. It could be 12, 24, 36, 48 or 60 months, depending on the type of loan and your agreement with the bank or finance corporation.

Debt Consolidation

Because personal loans offer lower interest rates, it is perfect for you to consolidate existing debts. Your personal loan can pay off several smaller debts with higher interest. Debt consolidation has its advantages. When you consolidate debts with your personal loan, you can pay off what you owe faster, plus you can save money on the interest. In this case, personal loans can be very helpful especially if you have a hard time paying all your debts.

Smooth Cash Flow

Personal loans are emergency funds. They always come in handy. If you need to bridge a temporary gap between your cash flow, you can always run to personal loans. So if you are still waiting for your client to pay you for the project you made, you can get a personal loan and use it to pay your financial responsibilities for the meantime.

Boost Credit Score

Lastly, personal loans can boost your credit score. This will help you to achieve a diversity in the types of credits you have. Mostly, personal loans are paid in a fixed payment term in which you make the same payment each month. This will be included in your credit report and will boost your score.

What are the Common Mistakes in Getting a Personal Loan?

If you are convinced to choose a personal loan over other types of loan programs, then you should also consider avoiding these mistakes that most personal loan applicants do.

Borrowing without saving

Most applicants are borrowing money without considering to keep a portion of the loan to their savings. If you get your personal loan, do not fully spend it on things that do not give you something in return. Make sure that a part of it will be used to consolidate your debts or devoting it to your savings account. Applying for a personal loan requires a more responsible financial decision.

Not exploring other options

There are dozens of banks and finance corporations around you. They all offer personal loan but they do not have identical programs. It is important that you explore other choices. Choose the one that provides lower interest rate and more favorable terms. So before getting a personal loan, look around and compare loan programs so that you can have the best deal.

Skipping other costs and fees

Part of comparing banks and lenders is to compare the costs and fees. Sometimes, banks charge an origination fee, approval fee and other fees that can add up to the costs of their loans. Whereas, there are banks that simply provide personal loan without so many fees. Always consider the costs and fees of each personal loan program.

Ignoring credit score

We believe that you are already aware that before you get approved for a personal loan, you should have a good credit score. Personal loans do not ask for collaterals so they rely on your credit score. If you have a good credit rating, then more likely you will obtain a lower interest rate and a larger loan offering. So remember, make sure you have a good credit history for you to be granted a personal loan.

Lying on a personal loan application

Integrity is always the key to everything we do. In applying for a personal loan, do not fabricate any detail or information just so your loan application gets approval. According to the online lender Prosper Marketplace, they canceled 12% of loan applications because they have found inaccurate or insufficient information regarding employment and income. Thus, it is important that everything you provide on your application is true and backed with necessary files and documents.

Overspending

Overspending is the most common mistake of most loan applicants. A personal loan is the most common solution to pay down your balances on credit cards or consolidate your debts. However, most borrowers still cannot cut down their balances because they still overspend. According to Thomas Nitzsche, a certified credit counselor from ClearPoint Credit Counseling Solutions, borrowers go for the debt consolidation route, however, they still have the burden of large balances because they cannot address their overspending behavior. Thus, when you apply for a personal loan, your main goal is to cut down your balances and not to add more.