There are various reasons that justify applying for a personal loan. Some people need financing to complete home improvement projects or renovations, whereas another person might apply for a personal loan to consolidate his debts. Regardless of the reason for getting a loan, there is a wrong and right way to manage these types of loans. Banks and credit unions report loan activity to the bureaus, and borrowers who mismanage their personal loans can run into credit problems. For this reason, it’s imperative that all borrowers understand the do’s and don’ts of personal loan
Do:
1. Apply for a small amount.
Borrowers should only apply for what they need to avoid overextending themselves. Some borrowers get greedy and apply for a large sum of money. Although they might legitimately need money for a specific purpose, they might request additional “fun” money in order to go shopping or take a vacation. Monthly payments on personal loans are based on the amount, as well as the interest rate. Borrowers who take out a huge loan have higher payments, and if they can’t afford this payment, they risk defaulting on the loan.
2. Shop around.
Banks and credit unions offer varying rates on personal loans and the criteria for determining a borrower’s rate can vary depending on the lending branch. Borrowers need to request at least three quotes from three separate banks. This way, they can compare the different rates and terms and select the cheapest personal loan option.
3. Look into peer to peer lending options.
Not all money is loaned out by banks or credit card companies. Peer to peer lenders are becoming increasingly popular because borrowers are not treated merely as a number, but as a peer. Because this type of lending does not go through a bank, but rather qualified investors, the rates and options are more flexible for the borrower.
Don’t:
1. Sign the documents without understanding the terms.
Some borrowers mistakenly sign personal loan agreements without reading the fine print or asking questions. This can result in agreeing to a bad loan. It is important for borrowers to read the contract carefully and ask for clarification, if necessary. Borrowers who do not understand or agree with the terms should not sign the document. Signing the document makes the loan legally binding.
2. Rush the process.
Some lenders are pushy and they might persuade borrowers to sign loan documents before they are able to compare other loan offers. Borrowers should be leery of any lender that rushes the loan process or speaks negatively about shopping around. These lenders might have a few unscrupulous tricks up their sleeves, such as unjustly inflating the interest rate on the loan.
3. Forget to pay the bill.
Each late payment can harm a borrower’s credit score and destroy their reputation with the bank. Plus, lateness results in hefty penalties. People with good credit and good payment records are eligible for additional loans, as well as skip payment options and lower interest rates.
