Four Traps to Avoid When Getting a Personal Loan

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By

Susan Ranford

A personal loan is unsecured money you can borrow from a banking institution or other forms of non-formal financial institutions to help you meet whatever urgent financial need you may be facing at the time. It’s given on the basis of key factors such as:

• Your income level
• Your credit and employment history
• Your repayment capability

The thing about unsecured loans is that they are not really tied to any collateral on your part. The one thing that will suffer the most should you fail to repay your creditor is your credit rating. This means that it will be harder for you to get other loans in the future or even if you do get them, they will come at a higher interest rate since you will be ranked as a high-risk customer.

Why You Might Need a Personal Loan

Most people apply for personal loans for any given number of reasons. The most common of those reasons include things like making ends meet on the lower end of the spectrum or going for big ticket items like trying to start a small business. For the majority, however, the reasons include:

• Buying a car
• Tuition fees
• Medical bills
• Mortgage payments

Personal loans are good but they also come with their own faults. Economic experts argue that personal loans have their own shortcomings and traps.

Traps to Avoid When Getting a Personal Loan

As much as you prefer them to borrowing from your credit cards, you need to have a close look at the following traps before or when going for a personal loan:

Early Payment Penalties

It might sound odd, but it’s true that some money lending institutions charge a prepayment penalty. Anybody giving out money to a borrower will want it paid back earlier rather than later. This is not the case with private personal loan lenders. Most financial institutions organize prepayment penalties as one way of capitalizing on all the interest they plan to collect.

Therefore, you can expect to be penalized if you’re planning to pay back your loan before the final payment and the date is due. If you’re borrowing an amount that’s not very high and you are certain you can pay it back quickly, be warned that you will probably be penalized.

There is also another trick that some money lending institutions use to ensure that you pay the interest amount even if you pay the entire amount back early. This is called the ‘Pre-compute Interest’. What happens here is that the lender will compute the total amount of interest that you’ll have to pay and add it to the total capital borrowed. It’s also another way of sneaking in the prepayment penalty because if you decide to pay your loan earlier than scheduled, you‘ll still be paying the entire interest amount that you would have paid if you paid by regular payment with installments.

Additional Insurance

When meeting with a loan officer, you’ll hear them talk about life insurance accompanying your personal loan. You will be right to wonder why this is important. The payback duration of a personal loan is generally short, the loan officers will convince you to add a life insurance feature to your personal loan. The reason behind this is that in the event you pass on, your family will not be stuck to pay back the loan. You might be fooled into thinking this sounds great, but it doesn’t.

The Interest Rates

The interest rates involved in getting a personal loan is another thing anyone interested in borrowing money should consider before getting him or herself into a trap. Personal loans always have an average interest rate which is lower than popular credit cards.

Personal loans, just like good credit, offer a higher limit on a person’s credit and give one a decent chance to achieve good interest rates on future loans. Despite this good advantage, this still does not prevent some organizations from attempting to sell people loans that are higher than what they deserve.

Origination Fees

There is a very good chance that the financial institution you choose to borrow from will charge an ‘origination fee’, as is the norm with most. Therefore avoiding these fees may not be an option for you. If you want to know whether or not you are getting a good deal from your lender, compare the Annual Payment Rate (APR) and not just the interest rates. The APR often includes the origination fees that the company charges. Here are the two main ways through which you will get stuck with hefty origination fees:

• Not adding the origination fees to the total amount borrowed: For the most part, the origination fees may be a borderline negligible percentage like 3% of the total amount. The thing is though, that financial institutions tend to stick that 3% onto the total amount disbursed to you. So if you want to borrow $10,000 with an origination fee of 3% then you should borrow $10,310. That way once the origination fee is deducted, you get your $10,000.

• Insisting on getting a refund should you prepay: Remember when we spoke about how lenders charge you a fee for paying them back early? The same equation applies to the origination fees. If you pay your $10,000 back a little earlier than you should then you will get the 3% back. But if you paid it a day too late, you will lose that money.

Be sure to ask your lender about all the attached fees before applying for you personal loan. If not to get a full picture of your entire debt, then to understand how much extra you need to apply for to get the amount you actually want.

Susan Ranford

Susan Ranford is an expert on career coaching, business advice, and workplace rights. She has written for New York Jobs, IAmWire, and ZipJob. In her blogging and writing, she seeks to shed light on issues related to employment, business, and finance to help others understand different industries and find the right job fit for them.