Do’s and don’ts for getting a personal loan

There are a few standard do’s and don’ts that every person should follow when looking for a personal loan and filling out the application. People use personal loans for various reasons, like debt consolidation, large or emergency expenses, and home renovations. You can also use personal loans for vacations or weddings. No matter what the reason is, make sure you shop for the best personal loan lenders to get the best rates. 

Top do’s and don’ts when getting a personal loan

Do: Shop Around

There are a variety of lenders out there, so shop around to see which one fits your needs most closely. Banks and other financial institutions can help you get a personal loan, so talk with multiple people before narrowing down which one is right for you. Also, look at your credit score to know what terms to expect based on your score and what risks or challenges you may run into if your score is low. 

Do: Look at the Fees

There are a variety of fees that can come with personal loans. You might have an origination fee for taking out the loan or penalty fees if you repay the loan quicker than your loan terms. See the interest rate from the lender you are considering, and make sure you can afford the monthly payment. See how long the repayment term is and know whether the loan is secured or unsecured. 

Do: Try to get prequalified

Getting prequalified for a personal loan lets you feel confident in your approval odds and helps you figure out the loan terms before actually applying. This does not impact your credit score and is a helpful tool when considering loans. 

Do: Know your credit score and consider the risks

Check your credit reports to see your lending history. If you have demonstrated that you always pay back your loans on time, you are more likely to get approved. Higher credit scores will generally lower your APR, so work on getting the highest score possible before you apply. Consider the risks of poor credit, like higher interest rates, needing a cosigner, or putting up collateral. 

Don’t: Borrow more than you need

Borrowing more than you need not only means that you have to pay more back, but you are also paying more in interest. Carefully calculate how much you need from your personal loan and budget how you will spend it. You can give yourself a small buffer if you wish, but do not borrow the maximum amount you are offered just because it is available. A good rule of thumb is to not exceed 5% to 10% of your monthly budget in loan repayments. So, if your monthly budget is $1,000, your monthly payment on your personal loan should not be more than $50 to $100. Overborrowing increases your risk of missed or late payments. 

Don’t: Forget to make your monthly payment

When you forget to make your monthly payment, you get charged late payment fees, risk defaulting on your loan, and harm your credit score. Put it in your calendar if you have trouble remembering when to make your payment or enroll in an auto-draft, so it gets paid each month automatically. 

Don’t: Accept the first loan offer you get

If you accept the first loan offer, you are probably not getting the best loan terms on the market. Shop around, research, and have a goal of what words you would like from your loan. Consider the offer before accepting, and always read the fine print to know exactly what you agree to. 

Following these dos and don’ts ensures you are being smart when getting your next personal loan.