With the holiday season fast approaching, many families are going to look to personal loans to help come up with the cash for the extra expenses associated with the end of the year. From Thanksgiving to Christmas, New Year’s to Kwanzaa and Hanukkah, food and gifts can often overbalance a carefully constructed budget. Personal loans can free up a little more wiggle room for these once-a-year bills, but sometimes, shoppers do not know how some companies try to take advantage of desperate consumers at this hectic time of year. No matter where you shop for your next personal loan, here are some traps and pitfalls to watch out for.
Personal loans often come with an origination fee. This fee can range anywhere within the 1-5% range, depending on the total amount and specific type of loan you are applying for. This fee will frequently be taken from your loan funds; this means that if you applied for a total loan amount of $1,000, you’ll actually only receive $950 in hand when you finalize the loan ($1,000 x 5% = $50). Sometimes, these fees are hidden in the fine print. Always assume there will be an origination fee, and if you cannot find that information in the paperwork, ask your lender to point it out. You might also want to inquire about any other fees your lender will assess on your loan.
Some lending companies offer loan insurance; this is meant to provide some coverage to you, in case you miss a payment. There are also unemployment insurance options that can make loan payments on your behalf if you are out of work during your repayment term. Another popular option is life insurance on your loan, which will repay your loan if you should die before your loan is paid off. Now, all of these ideas sound like great options for the contingencies of modern life. Why not?
Instead of “loan life insurance,” why not consider a general life insurance policy, which can provide your family a means to handle any of your remaining debts and expenses when you pass; rather than being applied to only one specific loan, general life insurance can be used for any expenses your family needs. Regarding that unemployment insurance option, examine your situation carefully. Just how likely is it that you might lose your job while you are making payments on this loan? If it is not too likely, that is not an expense you necessarily need. Loan insurances like these are often expensive in the long run, and many policies contain extraordinarily specific loopholes that will more than likely not benefit you. If you really want to consider these options, inquire about how much the insurance will pay, and for how long (full payment amount for 3 months, partial payment amount for 6 months, etc.).
We know there are more factors than just interest that you need to consider when choosing a personal loan, but interest is a significant factor. Lenders use very different calculations to determine the interest rate you will pay, but a good average is 14% to 18%. Obviously, if your credit is poor rather than fair, you will be offered significantly higher interest rates, sometimes up to 25%. If your credit is good or great, on the other hand, you can perhaps see interest rates in the realm of 4% or so. Know your credit score before you apply, and be upfront with the lender about the state of your credit or lack thereof. If you know the kind of interest rate you should see, lenders will not be able to pull the wool over your eyes.
There are many benefits to obtaining personal loans, especially during this time of year. Just beware of a few crucial points throughout the process, know what you can realistically afford, and stick to your decisions and budget, no matter how great an offer might seem.
We are not financial advisors and therefor are not giving any financial advise. Before implementing any of the tips on this website, please consult with a financial planner to ensure it makes sense for your individual financial situation.