When applying for loans such as a personal loan, it can be tempting to taking out a loan is something that you will do at some stage of your life. Having a smooth application process is something that you may be aiming for. If you are not careful, you could fall into these 8 borrowing traps that could cost you more.
Avoid biting off more than you can chew
When applying for loans such as a personal loan, it can be tempting to borrow the maximum amount that is available to you. Australians borrowed $5, 695 million in personal loans in November last year to finance an array of expenses, but many fall into the trap of biting off more than they can chew. Therefore, borrow an amount that you will be able to take. A general rule of thumb is to not take out a loan that is more than your monthly income.
Not reading the fine print
Before signing your name on the dotted line read the fine print. By reading the terms of the loan you will be able to see if it is affordable, has flexible repayment terms, or the fees and charges that come with it. It is also the perfect opportunity to ask your lender questions on the fees and charges.
Not checking early repayment penalties
Check to see if you will be able to pay off your loan early without paying a fee as some lenders may charge you an early repayment penalty fee which can range from $0-$500.
The pros and cons that come with a loan amount
The loan amount that you apply for will affect the interest rate and the loan term. Therefore, check if the loan amount you are applying for comes with any benefits or pitfalls that can potentially boost or harm your finances.
Avoid applying for too many loans
Every time you apply for a loan a lender will make a hard request on your credit file which can affect your future lending. What this means is that if you apply for loans or credit this will appear on your file. Applying to many times puts you at risk of being rejected which can have a negative effect on your report as lenders can see you as a risky borrower.
Taking out a personal loan for something you can save for
A personal loan can be great for taking care of important expenses. However, it is useful to check the reasons why you are taking out a personal loan. Sometimes all it takes is patience and saving to cover an expense.
Taking the first loan that seems to have a good interest rate can be a costly mistake. Even if your lender states that this is the best rate on the market, it is important to compare for yourself to see if there are no other lenders that will offer you a loan with a better rate and features.
Check your credit score and report
Not checking your credit score and report can harm your chances of having a personal loan approved. Checking this will let you know if you meet your lender's requirement. It can also show you if your credit report has any arrears or errors that need to be fixed to increase your chances of approval.