8 traps to avoid when taking out a personal loan
Taking out a new loan can be a dangerous endeavor
. Here are the eight costliest traps to watch out for when taking out an unsecured personal loan.
Unsecured personal loans are the simplest products there is, but the finance industry still manages to squeeze in a good number of extra ways to make money from you. Before you borrow money, read about these traps:
1. Small and fleeting
The temptation with loans, particularly if they're being actively sold to you, is to go for an even bigger sum than you first thought. What's more, the lender will often convince you to drag out the loan for longer to reduce the monthly repayments. They're not being helpful; they're trying to earn more money over a longer time frame. When you pay debt interest, you'll never get it back, so you want to make the loan as short and small as possible to keep down those costs.
2. Consider alternatives such as a personal loan
You should compare an unsecured loan with your most likely alternatives. The first and best, if possible, is saving up to buy later, but otherwise you can use credit cards to get a short term low interest rate. If you know a friend or family member that can help you can use
one2onelending.com to guide you through the process of developing a personal loan.
If you use a personal loan to pay off other debts, ensure you cut up any existing credit cards and close the accounts. Avoid the temptation of using your debt-free credit cards and rack up more debts on them.
3. Fixed interest rates
Most personal loans have fixed interest rates, but you do have to watch out for the occasional variable rate loan. Look for the word 'fixed'. Variable rates can increase you monthly payment to an amount that may be unaffordable.
4. Compare the total cost of the loan not the just the Annual Percentage Rate.
The annual percentage rate or APR is meant to be a standard way of comparing the cost of a loan over a year. However, the APR can be manipulated by the lender, so the best way to compare the cost of a loan is to look at the total amount repayable as well as the loan closing costs and other fees. This is the total cost including interest and charges that you will pay from your first payment to your last. You should also make sure that you can afford the monthly payment.
5. Terms and Conditions
Look for better Terms and Conditions. With personal loans, this normally means that you're allowed to make additional payments or that you're not charged extra if you want to pay off the whole loan early. Those terms are rare, but they do exist, so keep an eye out for them. Make sure you understand any fine print before you take the loan.
6. Origination fees
It's the total cost of the loan that is the most important figure. However, you also want to know if this includes charges other than interest, such as an origination fee. When comparing loans, make sure you include the origination fees charged by all options you are considering.
7. Shop around for a good loan
Do you trust your bank to have your best interests at heart? Thought not, but that doesn't stop some people from being persuaded to take out a loan from their own bank. Your own bank will almost never offer you a competitively cheap loan, simply because it finds it so easy to sell expensive products to its existing current-account customers.
Instead, shop around. Visit sites like
http://one2onelending.com/index.php that has a resource center that will help youto compare the latest published rates before you apply.
8. Avoid gimmicks
Loans should be simple products, but lenders like to entice you with such things as cash back and payment holidays. Loans with cash back are inevitably more expensive, particularly if you want to pay off the loan early, as you'll lose the cash back. Payment holidays (which are when you can take a month or two off payments) are really sneaky in that the interest will still build up in that time and it will increase your repayments for the rest of your loan. Such a break is surprisingly expensive.
8 traps to avoid when taking out a personal loan
By: Albert Hepfinger
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