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Personal loans are among the most versatile types of debt, allowing you to use the money for a variety of purposes with few restrictions. Before you apply for one, however, review these tips that can save you money, protect your credit and help you avoid unnecessary debt.
Personal Loan Do's
Personal loans can be a good way to consolidate debt, cover emergency expenses, pay for home improvements and more. But it's important to use them wisely. Here are some ways to do that.
Do: Check Your Credit Score Before Applying
Personal loans are available for consumers across the credit spectrum, but unless you have a good credit score or better, you may have a hard time securing an affordable interest rate.
Check your credit score to see where you stand. If it needs some work, consider taking steps to improve your credit before you apply for a personal loan.
Do: Consider Your Reason for Applying
Personal loans can be advantageous in certain circumstances, but that's not always the case. Think about why you want to borrow money and consider whether a personal loan will help or hurt your financial situation.
Some of the more prudent uses for a personal loan include:
- Debt consolidation
- Emergency expenses
- Home improvements
- Wedding expenses
- Moving costs
If you have a big expense coming up and don't have the cash to pay for it out of pocket, a personal loan can be much more affordable than a credit card or a payday loan.
However, if you're thinking about using a personal loan to pay for a vacation or another unnecessary expense, consider the cost of the loan and whether it's worth it in the long run.
Do: Compare Lenders and Terms
If you've determined that a personal loan is right for you, you can typically get a personal loan from banks, credit unions and online lenders. Take your time to shop around and compare interest rates, repayment terms, fees and other factors that are important to you.
This process can take a little longer, but it can help ensure that you get the best terms that are available to you.
Do: Sign Up for Autopay
Once you've completed your loan paperwork and received the funds, create an online account with the lender and set up automatic payments. Some personal loan companies may offer a discount on your interest rate with autopay, and it'll help ensure that you always pay on time.
Personal Loan Don'ts
As you navigate the application and payment process with a personal loan, here are some things to avoid to ensure that you make the right decision and have a good loan experience.
Don't: Get a Loan You Can't Afford to Repay
As you shop around and compare options, lenders will typically tell you what your payment will look like. Take a look at your budget before you apply to determine if you can afford the monthly payment and whether you might need to give up or delay certain financial goals.
If your personal loan payment makes it difficult to build an emergency fund, pay off high-interest debt or save for retirement, it may not be worth it right now.
Don't: Borrow More Than You Need
If you've decided that a personal loan is the right move, be sure to avoid taking out a loan for more than you need. Run the numbers to determine what it'll take to achieve your goal and only borrow that amount.
If the lender you're considering charges an origination fee, incorporate that into your calculation to get the right figure. For example, if you need $10,000 and the origination fee is 5%, the lender will deduct $500 from your disbursement, leaving you with $9,500.
To get $10,000 after the origination fee, you'll need to borrow about $10,530 to make sure that you get enough.
Don't: Miss a Payment
If you miss a payment by even one day, your lender may assess a late fee, which can vary depending on the lender. If that payment remains unpaid for 30 days or more, the lender may report it to the credit bureaus, which can damage your credit.
If you find yourself in a difficult financial situation and you're unsure about whether you can pay your loan, contact your lender and ask about forbearance or loan modification options.
Get Matched With Personal Loans Based on Your Credit Profile
Shopping around for a personal loan is essential, and many lenders allow you to get prequalified and view rate quotes without a hard credit check. But going through that process with each individual lender can be time-consuming.
With Experian CreditMatch™, you can get prequalified with multiple lenders at once with just one application. The process also allows you to compare quotes side by side, making for a quicker and more convenient process.