10 Common Personal Loan Mistakes To Avoid
When you’re in need of cash and considering a personal loan, the prospect of choosing one out of dozens of available lenders and trying to suss out the best offer on the table can be daunting.
Before you decide to move forward, there are quite a few mistakes we’d like to help you avoid — anywhere from making sure you qualify for the best rate to not paying too much in fees to making sure you need a loan in the first place.
10 personal loan mistakes to avoid
Mistake #1: Not checking your credit score first
All too often, people do not take the time to assess their credit prior to making a personal loan application. When you don’t know where your credit stands, you have to take the lender at their word when they check your credit and give you an offer. This offer may not actually be the best you can get, but you won’t be able to tell if you don’t know your score first.
In addition, when you don’t know your score first, you may waste time applying for loans with no hopes of ever getting approved, getting dinged for multiple credit inquiries for naught.
If you know that your score is too low to likely get approved for a good offer, you can make a plan to improve it.
You can check your credit score for free at My LendingTree.
Mistake #2: Not getting pre-qualified
In addition to knowing where your credit score falls, we recommend seeing if you prequalify for a loan first. With an affirmative prequalification, you can know with reasonable certainty whether your chances of approval are good or poor — without affecting your credit. Many lenders online will run a soft inquiry on your credit to pre-qualify you. If you’re pre-qualified, they may also give you a preview of your loan rate and terms, which can make it easy to compare offers from multiple lenders before you are ready to officially apply.
If you are denied for a prequalification, it’s no harm, no foul — your credit won’t take a hit.
Mistake #3: Focusing solely on the monthly payment
When you’re shopping for a loan, you’re probably laser-focused on the monthly payment to be sure you can afford it — but don’t stop there. Wrapped up in that monthly payment could be a whole host of fees.
Once you check out the monthly payment, review the APR specifically. It includes the interest rate you’ll pay, as well as the cost of the origination fee (if there is one). Origination fees are generally around 1% of the loan amount, but they could be much higher depending on your credit profile and the lender.
In addition, other fees may include things like late fees, check processing fees, and prepayment penalties. It’s always a good idea to know what these fees are upfront, so you don’t make a mistake that costs you money later down the line when you have to pay some sort of fee.
Mistake #4: Using your personal loan for something frivolous
Vacations, gifts, and luxury items are among the worst reasons to take out a personal loan, but people still do it. It’s your money, so you get to decide how to spend it. But taking on the liability of a loan to cover a non-essential expense can come back to haunt you later, especially if you find you’re unable to keep up with the payments.
Good uses for personal loans include things like covering medical expenses, debt consolidation, or emergency expenses. Otherwise, you may be setting yourself up for financial hardship and regret.
Mistake #5: Not reading the contract
Too often, people sign things they haven’t read. This is especially true when you have a pushy salesman running you through the loan process and tell you, “sign here, here, and here.”
The way around this is to bring someone with you to help you slow the process down. Make sure it’s someone who isn’t emotionally involved with the process and doesn’t mind being assertive or challenging the salesperson. Take time to read what you’re signing, before you sign. Your lender should disclose all the terms of the loan. If you have questions or are uncertain, don’t sign until you feel you understand.
Mistake #6: Applying for too much credit
Don’t buy a house, boat, car, or other major purchase on credit right before applying for a personal loan or while you’re in the process of getting the loan. Taking out additional credit before or during your personal loan inquiry may hurt your chances of qualification. In addition, taking out a personal loan while you’re in the process of closing on your mortgage isn’t a good idea either. So make sure you’re only applying for one loan at a time and give it some time before you attempt another inquiry on your credit for some other purpose.
Mistake #7: Not having a co-signer
Not everyone needs a co-signer, and there are many pros and cons for both you and the person cosigning. However, if your credit is poor, it’d be a good idea to have a co-signer ready on the sidelines. Having one can help you qualify and may help you get more favorable terms for your personal loan.
Mistake #8: Not looking at prepayment penalties
If you plan to pay off your loan early, it’s imperative that you determine whether your personal loan has any prepayment penalties. If it does, it can really put a damper on paying off your loan early. Make sure you read the fine print to keep yourself out of trouble here.
Mistake #9: Making late payments
Late payments adversely affect your credit score, while making on-time payments can help improve your credit score. One of the easiest ways to avoid the mistake of making a late payment is to set up automatic payments — that way, you’ll never accidentally miss a payment and your payments will always be on time.
Mistake #10: Not repaying the loan
Of course, one of the worst mistakes you could make is not repaying the loan. You may be wondering: what happens if I don’t repay? Any number of things could happen, including the loan being sent to collections or you being taken to court. If it’s an unsecured loan, your property isn’t tied to the loan — but if you have a loan with collateral, you may lose your collateral. Either way, avoid this mistake if you can.
What to do if my personal loan is rejected
If your personal loan is rejected, don’t rush out and reapply. Take a few months and improve your credit using these tips. While we think personal loans are best, consider these five things before you rush out and get a payday loan.
If you think you’re ready to move forward with a personal loan, read these five things to consider before you get your personal loan. Then look at the LendingTree personal loan page to get your personalized rates.