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What is a Personal Loan?
A personal loan is an installment loan where you borrow a set amount of funds and pay the loan back with interest through monthly repayments. Most of these loans are unsecured, which means that you do not put up assets as collateral or a down payment.
Personal unsecured loans tend to have lower borrowing limits and shorter timeframes for repayment compared to secured loans. The average borrowing is $2,000 to $10,000, to be paid back within several years.
These loans are often used when an individual needs immediate funds. Common reasons for needing a personal loan include consolidating debt, medical bills, car repairs, and other unexpected situations.
Loans like these include various terms based on your credit, income and the amount that you want to borrow. If you have bad credit, you can still apply for a personal loan. However, to offset the risk, lenders may offer a higher interest rate.
Common Traps That Borrowers Should Learn to Avoid
Applying for a personal loan may provide an effective solution for covering your expenses. However, there are several traps that borrowers should try to avoid. These common mistakes include borrowing more than you can afford, paying expensive fees, and getting loans for unnecessary expenses.
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1. Avoid Borrowing More Than You Can Afford to Repay
Before getting unsecured personal loans with bad credit and instant decision from the lender, you should create a budget.
Creating a budget helps you determine how much you can afford each month to handle your loan repayments. Total the amount of money that you take home each month and subtract bills and living expenses to determine how much you have available.
The typical recommendation is that your debt repayments should not exceed one-third of your total disposable income.
2. Avoid Personal Loans For Things That You Do Not Need
Another common mistake that borrowers make is getting a loan for unnecessary expenses. These loans should be used for things that you need instead of things that you can save up to purchase.
For example, most financial experts advise you to avoid getting personal loans to fund weddings, vacations, or big purchases that you do not need. These big, one-time purchases can be planned for. By saving up the funds, you can avoid the interest that you would have paid on a personal loan.
There are articles you can find online that will tell you more about personal loans. Further reading before applying for a personal loan will help you become more aware of the to-do’s as well as the things you should not do.
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3. Avoid Getting A Loan Without Understanding The Fees
If you decide that a personal loan is the best way to fund your expenses, you should not apply without understanding the fees. Different lenders provide different terms, including a variety of extra fees that may increase the total cost of the loan.
For example, some lenders charge a hefty early repayment fee. They charge extra when you pay the loan off before the scheduled timeframe. Other potential fees include origination fees and late fees. While some of these fees are necessary, the amount that you get charged can vary.
The bottom line is that a personal loan often provides a convenient way to cover unexpected financial situations. These loans are even available for people with bad credit. However, you need to compare options before applying for a loan to find the best terms, including lower interest rates and fees.
Thanks for reading!
Time to discuss more on Personal Loans in the comments below.
Some questions for you:
What was your experience when you got a personal loan?
Did you think about the 3 tips above before getting the loan?