Don’t Borrow from Friends or Family
There are few things that can cause more trouble than financial issues between friends or family. Remember, although you may have every intention of paying back a loan,obstacles and problems may arise. This trouble is easily avoided; leave family and friends out of your personal financial matters.
Don’t Borrow from Shadow Banking Lenders
Borrowing money from an unofficial lender can cause major issues. They are not bound by the same rules that an officially sanctioned lender is, such as a bank. However, the most important thing here is regulation and accountability. Unfortunately, shadow bank lending can often be driven by unscrupulous lenders, jacking up rates at will.
Don’t Agree to a Variable Interest Rate or Pay Large Origination Fees
Most personal loans have fixed interest rates, but you must ensure that the loan you are taking out is fixed. If not, there could be a nasty surprise waiting for you down the road.In addition, some shadier lenders will attach large origination fees to your loan and roll it into the payments. Make sure to work with regulated lenders and read the fine print to avoid this trap.
Don’t Simply Settle for Your Personal Bank
Many banks will give their customers an easy loan, but you are kidding yourself if you think they will automatically give you the best rate. While it may be more convenient, it might be more expensive. Take the time to shop around and do your homework, compare personal loans from different banks and money lenders.
Don’t Fall for the Gimmicks
Avoid all the gimmicks and promotions offered by lenders. This could be, for example, a new television or a family vacation. Guess what? Even though you don’t have to pay for the added extras, interest still builds up.
Do Keep Track of Your Credit Score
Keep track of your credit score, because this opens up the door to more reputable lenders. The better your score, the more likely you are to not only get approved by a highly regulated lender, but it should lend itself to procuring a better interest rate.
Do Pay Attention to Prepayment Penalties
Pay attention to whether there are prepayment penalties with your loan. If you are able to repay your loan early, that’s great. However, make sure that it’s not going to cost you more money to do so.
Unfortunately, this is something that many people do not pay attention to. Take note of the total amount repayable, and not just the APR (annual percentage rate of charge).
Also, pay attention to the additional penalties that you may accrue by making a late payment. These are killers and can cause major long-term issues. Make sure you clearly understand the ramifications if you can't pay or time or worse, can't pay back the loan.
Do Consider Co- signers Carefully
One of the easiest ways to get a loan is to have somebody with better credit co-sign on the loan. However, this is something that you should only do as a last resort as any hiccup or problem paying back the loan, could put someone else’s financial security at risk. This could cause major personal problems.
Do Avoid Payday Loans
The rise of so-called “payday loans” over the last several years has been explosive. Interest rates for the average payday loan can be over 300%, rates that would make a loan shark blush. In fact, these lenders have become illegal in over a dozen states.
Do Shop for a Better Interest Rate
Obviously, the interest rates that you are going to pay on the personal loan will make a huge difference. Remember that compound interest works in both directions, so the higher the interest rate, the longer it will take to pay off the debt, and of course, it will cost more money over that time period. Although the loan can help, understand that it isn’t a long-term solution. Use your experience to drive home the point that you simply must save for the long run. Again, these loans should be the last resort.
The Final Word
Make sure you know the ins and outs of the personal loan agreement, and ensure you are getting what fits your needs. Far too many people see the short-term gain and ignore the devastating longer-term consequences.