Your OppLoans Road Map to Personal Loans: The Dangers of the Road (Part 2 of 3)
So you’re ready to hit the road and find the best personal loan for you. But are you prepared for the potholes, hazards and detours that may await you on your journey? You’ll save time, money and energy if you know what to watch out for before you set out on your personal loan road trip.
There are many types of personal loans out there to choose from and they all offer different rates, terms and conditions. And there are many lenders who will take advantage of you by trapping you in a cycle of debt. Think of them as those shady mechanics telling you your car needs a brand new engine even though you’re really just low on, say, windshield washer fluid.
Here are the hazards to watch out for on your journey through the world of personal loans:
High interest rates
Getting a loan with interest rates you can’t afford is like planning a three-month Appalachian Trail hike even though you get winded just looking at a flight of stairs. It’s just not good common sense. And unfortunately, there are a lot of personal loans out there with very high interest rates. One way to avoid this is to have a good credit score, because a good credit score shows lenders that you’re trustworthy and likely to repay the loan on time. The better your score, the lower your interest rate (read more in What You Should Know About Interest Rates).
But what if you don’t have a credit score? If your credit score is your car, a brand new Audi will get you to your destination faster than a 1988 Ford Tempo. But not everyone can go out and get a brand new Audi. They’ll have to save up for one.
And the same is true for your credit score. There are no easy fixes. Paying your bills on time, only taking on as much debt as you can handle and paying off any outstanding balances you have as quickly as possible are the best ways to improve your credit score. But it will still take time.
For people who already have a good credit score, remember that you can definitely qualify for lower interest rates on homes, auto loans, personal loans and more. For people whose credit scores are not-so-good, remember that a better score is within your grasp.
Paying off a loan on time is a great way to raise your credit score. And having a good credit score is definitely worth it. In the long run, it will mean that you’re saving money. Someday, you might even be able to afford a real Audi.
Unnecessary fees and penalties
You’re cruising along the highway, then BAM! You get a flat tire. That jolt of adrenaline and fear is exactly what it feels like when you discover some hidden fees on your personal loan.
Make sure you read the fine print so you know exactly what you’ll be charged and why. For instance, some lenders will charge you simply for paying off your loan early. They call this a prepayment penalty.
But shouldn’t it be a good thing to pay off a debt early? It’s good for you, but probably means less money for the lender. Other fees to watch out for are application and origination fees. But you can avoid all of these hazards all together by going a different route…
These are the number one personal loans to avoid. Payday lenders are dangerous hitchhikers on your personal loan journey. They may promise some gas money, but that doesn’t mean that picking one up is a good idea. With payday lenders, their intentions are quite clear: make money off of borrowers through unfair, costly loans.
Getting a payday loan usually involves writing a post-dated check for the amount you’re borrowing, plus additional fees and interest. The lender will then give you cash and deposit your check on the due date to get their money back.
Usually these loans only last a couple weeks, but they come with ridiculously high interest rates that make them difficult to pay back. How ridiculous? Try 400% annually—or even higher! These predatory loans trap many people in a seemingly endless cycle of debt. Like picking up a hitchhiker that just won’t leave. He’s going along for the ride, and there’s nothing you can do about it.
The road to a personal loan can be a dangerous and scary place, so keep your eyes peeled out there. Knowing best practices for personal loans will help keep you safe, keep more money in your pocket and keep you on the road to your destination: financial security.