Paperwork from a personal loan.

Biggest Personal Loan Mistakes

When it comes to take out a personal loan, or any loan for that matter, people tend to make a lot of mistakes. These mistakes can prove very costly, especially as the dollar amounts of these loans rise. If you are in the market for a personal loan, take 5 minutes and read about some of the most common mistakes that people make when looking for a loan. Avoid making the same mistakes and keep more of your money in your pocket.

Avoid These Mistakes

Loans are costly enough, so why make them even more expensive by adding errors into the process. Take a look at some common mistakes that can cost you thousands of dollars on personal loans.

1) Not Checking Credit

Some people never check their credit and just assume that everything is all good. This is a huge mistake because credit reports are often riddled with errors.

Before taking out a loan, you should pull a copy of your credit report. Pull one with each bureau and then check for errors. Hopefully all is well, but if you find an error, you will need to dispute it. The bureau then has 30 days to investigate this, so you should pull a report 45  to 60 days prior to looking for a personal loan.

You might be surprised at what can make its way onto your credit report. You could have other peoples bankruptcies, judgements or credit accounts. You could even have negative information of your own that should have dropped. Negative items typically fall off after 7 years but you might be surprised to find that charge off for 1400 bucks from 8 years ago still on there.

Once you are done checking and, if necessary, disputing information on your account, sign up for a monitoring service. Services like Credit Karma are free and can keep you up to date on your credit health.

2) Not Shopping The Loan

Interest rates can vary significantly from lender to lender and it pays to shop your loan around a bit.

Many people do not like to do this because they are afraid of multiple hits on their credit report lowering their score. This is not necessarily the case. Creditors know that people shop loans, so a cluster of inquiries near the same time often only count as one.

When shopping, don’t rely on websites that get you offers from lenders. Do not assume that they are giving you the best rate. Even quoted from this website may not be the offer, so we encourage you to get a quote and shop around.

3) Taking Out Too Much Money

Just because you are approved for a large loan does not mean that you need to take it all. The more money that you take, the more that you have to pay back and the larger your loan fees and/or interest will be.

Before taking out a personal loan, calculate exactly how much you need and resist the urge to get a little extra. If the loan is for credit card consolidation, add up all of the card balances before applying for your loan.

If the loan is for a vacation, calculate all your expenses like travel, hotel and entertainment.

Come up with a firm dollar amount so that you get a loan for the right amount to serve your needs.

4) Getting A Loan You Can Not Afford

Just because you are approved for a loan does not mean that you can afford it. Sure, your lender will attempt to judge your ability to pay the loan back but they only get a small snapshot of your finances.

Before accepting a loan, fit the payment into your budget. Do this and see how much disposable income you still have. If things look tight, you should consider passing on the loan.

A huge mistake that people make is just assuming that the money will work out. They either think that they will start making more money soon or they simply have a feeling that they can make it work. Those feelings are often very wrong.

If you take out a loan that you can not afford you could end up defaulting and ruining your credit.

5) Not Understanding The Loan

This is another huge mistake. People apply for a loan and then give the details only the most cursory of looks. If you do not read the loan details, you might not be understanding the true cost of the loan.

Some big items that people miss are prepayment penalties, late charges and origination fees. These things, among others, can make the true cost of the loan even more than you think.

A lender or lending agent might, as an example, slip an origination fee into the contract. These things need to be legally disclosed but an origination fee for five hundred dollars or more might be easy to miss, especially if you are eager to get the money.

Make sure that you read the terms of the loan before you commit to it. If you are bad with loan terminology, have someone you trust read the loan contract for you.

Wrapping Up

Loans are serious matters and even if you need the money quickly, you should take the time to do things correctly.

A little time spent doing research ahead of time can wind up saving you thousands of dollars on your loan.

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James Car is a finance, loan and budget expert based in the United States. After attending Brookhaven college, he went on to become a successful entrepreneur. He now enjoys writing articles that help people save and make the most of their money.