Watch Out For These Two Things When Applying For Personal Loans
Personal loans can help you achieve your financial goals, such as paying off credit card debt or starting a business. However, it's important to pay attention to the details when shopping for a loan to avoid signing up for one that isn't as beneficial to you as it first appeared. Here are two things to keep your eye out for when applying for personal loans.
Mandatory Automatic Payments
Lenders want to make it as easy as possible for you to repay your loan. Thus, it's not unusual for them to offer a bill pay option where your monthly payments are debited from your bank account automatically each month. While this can certainly help you avoid being late paying your loan or missing payments altogether, it's best to avoid taking out personal loans with lenders who require you to sign up for this service as a condition of being approved for the loan.
While it's understandable lenders with mandatory automatic payment requirements want to reduce the risk of default, this type of clause can quickly prove problematic over the course of the loan. Anything can happen during your repayment period that could make it difficult for you to make your payment as agreed. For instance, approximately 420,000 public sector workers are currently suffering a financial setback because they're not getting paid due to the government shutdown. Being trapped in a mandatory automatic payment scheme can lead to even bigger problems, such as overdraft fees or the inability to pay for necessities like food and rent.
Unless you're absolutely certain you'll always have the money to make your payments (e.g. you have extensive savings), opt to work with a lender that lets you pay on your own terms.
Origination and Prepayment Fees
Another thing to keep your eye on is origination and prepayment fees. It costs money to service personal loans, and some lenders try to recoup these costs by charging an origination fee that essentially results in you paying more money to obtain the loan than expected. Oftentimes, these origination fees must be paid upfront and are typically deducted from the loan proceeds.
Likewise, some lenders want to ensure they get the expected amount of profit from the loan and will charge a prepayment penalty if you pay off the debt earlier than they predicted. For instance, you may be charged an additional $500 if you pay the loan off within 2 years of the origination date. The penalty is usually assessed at the time you clear the balance on the loan.
Since fees like this can increase the cost to you, avoid loans that have them unless the lenders offer you something compelling in return (e.g. lots of rewards points or a lower overall interest rate).
To learn more about personal loans or for help in selecting the right one for you, contact a local lender.
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