Despite the convenience of this type of lending services, they should be used with caution. Personal loans are easier to obtain than conventional alternatives, and they cost less than predatory payday loans. However, there are still quite a few crucial considerations. Here are seven mistakes made by borrowers the most often.
1.Not understanding the nature of the tool
The relative accessibility makes personal loans tempting to those who should avoid borrowing in general. While the interest is lower than that for payday loans (the worst type of lending), it is still higher than the cost of old-school bank products. The purpose of a personal loan is to fix monetary shortages over a certain period (typically between 6 and 12 months). Therefore, borrowing should not be treated carelessly.
2. Not knowing one’s limits
A responsible borrower knows how much they can afford to pay every month. Go through your typical expenses and determine the monthly payment acceptable in the circumstances. Loans offer immediate access to money, so, naturally, some borrowers overrate their budgeting skills and available resources.
Craft a budgeting plan and follow it rigorously. If maths is not your strength, take advantage of budgeting software and smartphone apps. Do not borrow more than you can possibly repay considering the interest.
3. Using several lenders at once
This is a reckless but very common step. Clients struggling to cover their expenses accumulate debts by juggling several loans. This must be avoided at all costs. In addition to the need to meet multiple obligations, you will eventually be dragged into the vicious cycle of repetitive borrowing. Instead, focus on boosting your earnings.
4. Setting wrong priorities
Loan repayment must be your top priority. Failure to fulfill contractual obligations leads to penalties, fees, and even collection agencies bothering you. The funds you receive must not be misused, and monthly repayment dates should not be missed.
5. Forgetting about the costs
Remember that lending is not a free service. In addition to the principal amount, you will have to pay extra. The longer it takes you to repay — the more interest is eventually accumulated. Hence, it is wisest to repay in full before the period is over.
6. Not reading the contract
The agreement you sign is a legal document, and it must be taken seriously. Make sure every single provision is crystal clear. The agreement specifies the amount, the term, payment dates and methods, and consequences of non-fulfillment. You must be fully aware of your rights and obligations, as well as those of the lender.
7. Not communicating with the lender
Emergencies, such as medical bills, sudden unemployment, or death in the family, may prevent a borrower from making timely repayments. Whatever happens, lenders are the least understanding to those who avoid contact by ignoring phone calls. Instead, inform the institution of your complications as soon as possible. You may be offered a compromise, such as a temporary reduction of interest or monthly payment.