7 Things You Wish Someone Told You Before Taking Out a Personal Loan

Taking out a personal loan may seem like a straightforward solution to your immediate financial needs, whether funding a major purchase, consolidating debt, or bailing you out when you’re in a pinch. However, the simplicity of obtaining quick cash masks the complexities and potential pitfalls that accompany these loans.

Many borrowers enter into loan agreements without fully understanding the terms only to end up with stressful financial pressures and unwanted obligations down the line. So, here are some of the less-discussed aspects of personal loans to help you know what to look for and consider before you sign on the dotted line.

1. Collateral-Free Doesn’t Mean Risk-Free  

One common misconception about personal loans is that if they’re unsecured, meaning they don’t require collateral like a home or car, they pose no real risk to the borrower. This couldn’t be further from the truth.

Unsecured loans compensate for the lender’s increased risk by charging much higher interest rates than secured loans. This means you could end up paying a substantially larger amount over the loan’s lifespan than you expected — thus a higher risk of you defaulting.

To make things worse, failing to meet repayment obligations can do serious damage to your credit score. This affects your ability to secure future financing and may even influence areas of your life that are sensitive to credit assessments, such as job applications or rental agreements.

2. You Must Have A Stable Income 

With the above in mind, evaluating your financial stability and ability to manage repayments under the agreed terms is crucial. A steady and reliable income stream is essential for comfortably managing your loan payments over time. Without it, you could face struggles like late fees and additional interest charges, not to mention the negative impact on your credit score.

Conduct a thorough review of your financial situation and project your income and expenses over the term of the loan to get a clear picture of what you are committing to. One practical step is to prequalify for several loans to compare rates and terms. Options like Lending Tower loans let you prequalify with just a soft credit inquiry, which allows you to evaluate the best conditions for your budget without impacting your credit score.

Additionally, ensure you have a financial cushion or backup plan that can support your loan repayments in case of a sudden income disruption or other unexpected financial challenges.

3. Not All Personal Loans Can Be Paid Off Early 

You might be planning to pay off your loan as soon as your financial situation improves or you get a bit of extra money, but not so fast. Not all loan agreements are flexible in this regard.

Some lenders include prepayment penalties if you pay off your loan ahead of the agreed schedule to compensate for the interest they lose when a loan is settled prematurely. Yes, it may seem extortionate, but the idea is that lenders expect to receive a certain return on the loans they issue, and early repayment disrupts their financial projections and income from interest.

To avoid this, look for terms like “prepayment penalties” or “early payoff fees” before you sign any agreement. If your financial strategy is to pay off a loan early to minimize interest, flexible loan terms without prepayment penalties should be a key differentiator when comparing loan options.

4. Understand the Total Cost of Borrowing 

Interest rates are just the tip of the iceberg when it comes to the total cost of a personal loan. Numerous fees, like the sneaky prepayment penalties, can significantly increase the overall expense.

These extra costs often include origination fees, which are charged by lenders to process new loan applications. There are also administrative charges that cover the expenses involved in maintaining your account and some loans may have additional charges for credit insurance.

Because lenders frequently omit these extra terms from their advertising, you may end up with a tally that’s a lot higher than what you expected to pay. Make sure you do a thorough review of all the terms and conditions of the loan agreement, paying particular attention to the fine print to uncover hidden fees or additional charges before you finalize your decision.

5. Borrow Only What You Need 

It can be tempting to opt for a larger loan amount than actually necessary, especially because lenders readily offer this option during the application process. But while the immediate availability of extra money is appealing, always remember that it comes with long-term implications.

Taking on additional debt not only increases your repayment amount but also the interest accrued over time. This means higher overall costs and a longer repayment period. It might not seem problematic now, but this can impact your financial stability and future borrowing capabilities.

However, be aware that the loan amount you apply for is not necessarily what you’ll receive in your bank account. Your lender may take out the origination fees, processing charges, and other deductions before. Factor these in when calculating the total you need to borrow.

6. A Personal Loan Is Not Your Only Option 

Personal loans are great for loan consolidation and other financial uses, but sometimes there are other financing options that better suit your needs.

If you own a house, home equity loans allow you to borrow against the equity you’ve built up in your property, and they often come with lower interest rates than personal loans because your home serves as collateral.

Another option is a line of credit which you can draw from as needed, up to a pre-approved limit, paying interest only on the amount you use. This is a better option as an emergency fund or if you have ongoing expenses that you need credit for.

If you need a relatively low amount of cash, borrowing from family or friends is also a good no-interest or low-interest option, depending on the terms you agree upon.

7. Choose the Option With Good Customer Support 

We all know how important it is to be able to reach a business if you have any issues, but never has responsive and helpful customer support been more crucial than when it involves credit.

From explaining your repayment options to helping you understand loan terms or discussing potential difficulties, supportive customer care makes the process smoother and less stressful. Plus, should any issues like incorrect charges or the need to modify your repayment plan arise, having a dependable customer support team will make resolving them way less stressful. This prevents minor problems from escalating into a major complication.

Check reviews on platforms like Trustpilot or the Better Business Bureau (BBB). Then, go a step further and call or message the lender’s customer service with a few questions. This will reveal a lot about their response time and the overall quality of support you can expect.

Takeaway 

Remember, each financial decision carries its weight and consequences. Consider these tips and carefully evaluate your financial options to make sure you choose the loan option that works best for your current circumstances and financial goals.