Personal Loans - What You Need To Know - Part 2
Will Your Credit Score Be Affected?
Lenders will report the details of your account to the credit bureaus. Making your loan payments on time every single month will work towards improving your credit score. If you miss payments, your credit score will dive. If you are not 100% sure that you can keep up with those payments, think twice before borrowing.
How Do You Identify A Good Deal?
Start by knowing how to spot a bad deal. If a lender guarantees approval without first checking your credit history, that's a major red flag. If they ask you to send money to secure the loan, you may have accidentally stumbled into The Bank of Scam-erica. Get out while you still can!
Read the fine print of your agreement. Ignoring the details could have you well on your way to earning a degree from the School of Hard Knocks. If you find anything questionable within the terms, question it. If you're not comfortable, don't sign the agreement. Keep a sharp eye out for prepayment penalties. Many online lenders have no issue with you paying debt off earlier than initially agreed, and therefore don't charge you a fee. There are also financial institutions that charge fees for early payments. You should see "no prepayment penalty" written with the agreement. If you don't, ask the lender why. If you end up with some extra cash after a couple of years, you may want to pay the debt off to get rid of the monthly bill and the interest rate. Other than that, just find a term length that suits you. Look for manageable monthly payments and an interest rate that doesn't actively kill you.
What Are The Pros And Cons?
Like everything else in life, personal loans come with some pros and cons.
They're unsecured, meaning you haven't put up the family farm as collateral.
The interest rate is usually fixed. There won't be any fluctuations during the term, so you can rest easy with whatever budget you created.
It's your money, so you can do whatever you like with the funds.
You can enjoy a credit score boost. Making payments on time improves your credit score.
Because these loans are unsecured, the qualification requirements are strict, and approval may be difficult.
The amount you can borrow is fixed, based on the lender, your income, and your credit score. If it's not enough to meet your needs, too bad.
It's a one-time deal. Your payments will reduce your remaining balance, but unlike a credit card, these payments don't result in more available credit.
It's an open loan, which can negatively affect your ability to be approved for new credit cards or other loans.
Personal loans have a fixed repayment period, which can be either a pro or a con, depending on your situation and budget. The shorter your loan period, the higher your monthly payments, but the lower your interest rate. Conversely, the longer your term period, the lower your monthly payments, but the higher your interest rate.
You should only borrow what you realistically need, and what you can afford to repay. Don't try to keep up with the Joneses, unless you can afford it.
Watch out for scams and bad deals, and go with a financial institution you trust. There are a few new players in the lending game, especially online, so it's a good idea to check out the organization for legitimacy. The Better Business Bureau (BBB) and Federal Trade Commission (FTC) should be able to verify that a lender is reputable. Make no mistake, plenty of sharks are out there.
Before you sign anything, read it thoroughly and make sure you're comfortable with the agreement you're about to make.