A personal loan can be a beneficial way to manage finances, or it can present an opportunity to go further into debt. A Personal Loan Program has fixed interest rates and payment periods and are issued based on an individual’s credit standing. Below are five mistakes made with personal loans, along with some reasons why it’s important to avoid such errors.
Assuming All Personal Loans are Created Equal
A mistake made by many borrowers is viewing all loans as if they are the same. All personal loans are based on credit history and score, but there are two types: unsecured and secured. An unsecured loan requires a signature only, where a secured loan requires a form of collateral.
Personal Loans are a Better Choice than Credit
While it may be true in some cases, personal loans often have lower rates than credit cards. However, there are trade-offs to consider. Many personal loans have a minimum five- or six-year term, which means that the amount paid in interest could be much more than with a shorter-term loan.
Applying for A Larger-Than-Necessary Loan
Another mistake made by many borrowers is getting more loan than is needed. Some think that this tactic allows lenders to counter with a lower amount, but lenders’ decisions are based on their assessment of a borrower’s ability to repay the loan. If a person aims too high and can’t back up their promises, they could be denied a loan.
Personal Loans Will Improve Credit Standing
The logic here is that if a person gets a personal loan and uses the proceeds to pay off credit balances, the borrower’s credit rating will improve. There is a grain of truth to this; because a loan isn’t considered revolving debt, it’s not part of a debt-to-credit ratio. However, if there’s not enough money to pay the loan, such a strategy makes no difference. Missing a loan payment is just as bad as falling behind on credit card payments, and it can even be worse in some cases.
Even though it may be harder to obtain a loan from Pearl Hawaii Federal Credit Union if there are negative marks on a person’s credit report, it isn’t impossible. There are loans specially created for those with bad credit, and while any Personal Loan Program goes under consideration, it may be easier for such borrowers to get money from peer-to-peer programs or from family members.
