Personal loans are fantastic- they’re quickly processed and very useful for when you need funds on short notice to manage your finances. That said, they are a two-edged sword, which means if you don’t go about the motions the right way, you could be digging your own grave. What you absolutely must do to ensure this doesn’t happen is to understand what you are getting into, the perks, pitfalls, and everything in between, and also avoid some of the common mistakes borrowers like you make.
Expecting Personal Loans to Always Be Better than Credit Cards
There are some personal loans which have lower rates of interest than your credit cards, but the story doesn’t end there. Most personal loans extend over at least five years, which means the interest you pay over that entire time exceeds interest you pay on loans which are short-term.
Thinking It Is a Good Idea to Ask for More than You Need
It’s a bad idea to apply for a larger loan amount than what you would need. A lot of people employ this as a negotiation tactic, assuming the bank is going to give you a lower offer closer to what you need, but forget that lenders decide whether to accept your loan or not as well as the term and interest rate based on your perceived ability to repay the money. If you don’t have the income, credit score, or work history but ask for an astronomical amount, you could be rejected outright, or stuck with terms that force you to pay a heavy amount of interest. It makes no sense to go to such lengths for the money you don’t even need.
Assuming a Personal Loan Would Automatically Boost Your Credit
This misconception has some logic behind it. Once you take out a personal loan, you would be using it for closing the majority of the credit card accounts that you have. This would be enhancing your overall credit situation and rating. There could be some rudiments of accuracy here simply because the personal loan is regarded as installment debt and not a revolving debt so it is certainly not included in the credit utilization ratio, whereas any credit card debt would be. You may opt for consolidation of all your existing credit card debts into a single personal loan. This could at once boost your current credit score and help you get a lower interest rate as compared to most credit cards.
However, this could be a big question, particularly, when there is not adequate money for paying off the debt. So then this strategy would be making very little difference. If you miss a personal loan payment it would be really damaging. Moreover, you need to understand that since personal loans are taken for shorter terms, it is likely that your payments would be harder and larger to manage. You need to remember this while planning to consolidate all your credit card debts with a personal loan.
The greatest misconception, however, is that only great credit could fetch you a personal loan. There are in fact, five identified loans you could qualify for despite a poor credit score. It is surely not impossible to get a personal loan even if there are some unfavorable issues present in your credit profile. You could consider loans from peer-to-peer lenders, credit unions, and even family members as they are more viable choices when you have a bad credit score.