Top Things You Need to Watch Out for When Taking a Personal Loan

Compared to loans taken for a specific purpose, like purchasing a home or a car, you can take personal loans to meet various personal needs without needing to offer collateral. While the lender does not ask why you need the money, which can range from a medical emergency to a car breakdown, paying for a vacation, buying a gadget, and a million other reasons, it usually charges a higher interest rate to compensate for the risk. As convenient as personal loans are, you must be careful about the high interest that can drive you into debt and the negative impact on your credit score in case of default. Some of the most important things you must keep in mind when considering personal loans:

Borrow Only If You Must

Even though nowadays getting personal loans is as easy as clicking a few buttons online, you should first establish if you have no other option. While they are handy for bridging temporary cash shortages, you should think twice about taking them to pay for fancy electronic gadgets or exotic vacations. Personal loans are relatively expensive, and if you do not manage your repayment well, you could drown in debt.

Don’t Borrow More Than You Need

Even though many personal loan companies will be ready to give you relatively large sums, depending on your credit score, you should be conservative and borrow only what you need. It is because you must repay the lender the principal amount and the interest on schedule, failing which, you will be liable for penal interest rates and all sorts of late fines and penalties that can drive you deep into debt. Moreover, missing a payment can hurt your credit score, making it difficult to access credit in the future.

Borrow for the Shortest Tenor

It can be tempting to opt for the longest repayment tenor offered by the lender to make the monthly repayment more affordable. However, you need to know you will spend far more on interest by the time you repay the loan. According to Forbes, you should keep the tenor down as much as possible if you can afford the monthly payments. If you have a windfall earning, you should apply it to paying off the outstanding instead of blowing it on a fancy dinner.

Don’t Apply to Multiple Lenders

When you need cash urgently, you may want to apply to several lenders to ensure at least one approval. However, you should instead apply to only one lender you have shortlisted and feel confident about meeting their lending criteria. It will protect your credit score from damage by multiple lenders making hard inquiries.

Conclusion 

The best way of taking personal loans is to compare and contrast various lenders with good standing in the industry. You will be better off avoiding lenders advertising deals too good to be true because they could be scams. Beware especially of lenders that do not require any documentation and ask for processing fees by some name or the other before giving you the money. Ensure you read the fine print and compare the APRs to make the best decision.