What to Avoid In a Personal Loan
Posted September 20th, 2010
by PersonalLoans.org Staff
Shopping for personal loans online can be tricky. It’s much easier if you know what you’re looking for, and what to avoid. If you’re an old pro and have gotten many consumer and personal loans before, you’re probably aware of some of these tricks. If you’re new to credit, however, there are some things you should be on the lookout for:
- Lengthy loan term – usually spelled out in months, this is the time it will take you to repay the loan. Avoid lengthy terms since your interest will accumulate over a longer period, and you will pay more if the loan term is too long.
- High interest rate – could be variable or fixed. Make sure you know how high the interest rate (APR) could go if you make late payments or if the index rate changes. Avoid variable rate loans when the market is set to rise.
- Fees – are there penalty fees for things like late payments, missed payments, returned checks? What about fees for calling customer service or making a payment over the phone? Does the lender charge fees for using your credit card to make payments over the phone or on their website? If this information isn’t clearly spelled out, you can and should ask before you sign.
- Prepayment penalty – is there a penalty fee if you repay the loan early? Many lenders charge this fee to offset the interest they lose when borrowers repay the loan before it’s due. Look for prepayment penalties when applying for loans and avoid them if you can.
- Balloon payments – If there’s a balloon payment due at the end of your loan, you should be very wary. Balloon payments often cause customers to default on personal loans, since they aren’t able to come up with large sums of cash. If you default, you will end up owing more interest, fees, collection costs, possibly even attorney’s fees, so avoid this trap if you can.
- Payday loans – many lenders offer both personal loans and payday loans, but payday loans usually have a much higher interest rate and there’s only one payment – a balloon payment usually due within two weeks. If you’re looking for a personal loan you can pay back over the course of a few months or a year, you won’t get this with a payday loan.
Many people get so excited to learn that they could qualify for a personal loan, they don’t stop to ask many questions. Be careful when signing up for any offer of credit, however, since you will be stuck with the deal you sign for some time. Make sure you understand the repayment terms, fees, and penalties, and always avoid credit traps.