Avoid them at all costs.
- A personal loan can be a quick and convenient way to borrow.
- If you’re going to get one, you’ll want to avoid high interest rates, high fees, and prepayment penalties.
When you need cash on the fly, there are several options available to you. You can build up a tab on your credit cards and pay it off over time, or you can leverage the equity in your home and borrow against it as a loan or line of credit. But another avenue you could take is to take out a personal loan.
There are several advantages to borrowing through a personal loan. First of all, you are not limited in how you use your money. If you want to take out a personal loan to start a business, you can. If you want to spend that money on a luxury vacation, that’s your prerogative too.
Also, personal loans tend to close quickly. Often, you will have your money within days of submitting your loan application. And in rare cases, you can even have your money the day you apply, or within 24 hours.
But while personal loans can be a great way to borrow, there are some pitfalls you’ll want to avoid when getting one. Here are three to keep on your radar.
1. High interest rates
Generally speaking, you will pay less interest on a personal loan than on a credit card. But that doesn’t mean personal loans are universally affordable. Ultimately, it’s up to each lender to set an interest rate for a personal loan, so if you don’t shop around, you could find yourself stuck paying more interest than necessary on the amount you borrow.
Of course, if you need cash on the fly, you might not have much time to do this shopping. But try to get at least a few quotes from different lenders so you get an idea of what kind of interest rate is competitive given your situation.
2. High fees
Personal loans are not free. In addition to interest, you will usually be charged certain fees to set up a personal loan. Again, this is where shopping around could be to your advantage, because if a lender’s fees are particularly high, it could tempt you to take your business elsewhere.
As a general rule, the fees you pay on a personal loan should really not exceed 5% of the amount you are borrowing. If you are quoted a higher number, you may want to find a different lender.
3. Penalties for prepayment
Your personal loan can come with a generous repayment period. But what if your financial situation improves and you are able to repay your loan sooner? It’s an option you shouldn’t shy away from – that’s why it’s important to sign a personal loan agreement that doesn’t include a prepayment penalty. After all, why should it cost you extra money to get out of debt sooner?
When you need cash, it’s worth seeing if a personal loan is a good fit. But if you’re going to go this route, be sure to avoid these pitfalls along the way. All of them could end up costing you money unnecessarily, and that’s not something you want.
The Ascent’s Best Personal Loans for 2022
Our team of independent experts have pored over the fine print to find the select personal loans that offer competitive rates and low fees. Start by reviewing The Ascent’s best personal loans for 2022.