Personal loans offer several advantages to the borrowers. You get to know in advance how much money you will receive as a loan, the rate of interest is fixed, the monthly repayment of both the interest and a portion of the principal every month makes you more disciplined, and also you know for sure that if you make regular payments you will live a debt-free life once the loan term is over.
Nowadays, many banking and non-banking institutions are offering personal loans at an attractive rate of interest. In order to decide which lender is right for you, you should ask plenty of questions to clarify your doubts and read the fine prints in the loan document carefully to avoid unpleasant situations. Let’s take a look at the 3 common personal loan traps.
Fees:
Personal loans generally come with an origination fee and it ranges from 1% to 5% of the total loan amount. The percentage will vary depending on your repayment history, condition of the market, and your financial condition. The fee is taken from the total loan amount as soon as it gets approved. So, if you apply for $20000, you may get $19000 after the 5% deduction. Therefore, it is wise to add the origination fee to the actual loan amount while applying, otherwise, you will get less amount of money and your purpose won’t be fulfilled. If your lender says he does not charge any origination fee then ask him if there is any other fee that you need to pay.
High rate of interest:
Interest rate is one of the primary factors that you should pay attention to while comparing the personal loan providers in the market. Different lenders use different methods to determine the interest you need to pay for the personal loan and while the average rate of interest is 14%-18% it can vary widely as per your credit score. People having excellent credit score may get as low as 4% and those with poor credit may have to pay 25% interest annually. You need to find a company like for best interest rates.
Loan insurance:
Once you get the personal loan, some companies will try to sell you various types of insurance so that in case you miss the loan payment, the insurance will cover the losses. Some of the insurances that are offered by personal loan lenders are life insurance and unemployment insurance. It is always intelligent to buy life insurance from an insurance company that specializes in that field, not a personal loan firm. Also, if you have a steady job, there is no need to pay for unemployment insurance. Loan insurance is generally expensive and there are several terms and conditions associated with it. Thus, it is better to avoid any loan insurance and if the lender forces you, start looking for other options.
Conclusion
Once you get the loan, make sure that it is used for the intended purpose. Keep it safe in your bank account and spend wisely. Repay on time to enjoy a stress and debt-free life.
