Lenders who give out personal loans don’t just do so at random. Rather, you have to prove yourself to be a trustworthy borrower to qualify for a personal loan.
But if you have a really good credit score, you may find that getting approved for a personal loan is fairly easy. You may also be surprised at the amount of money you’re eligible to borrow.
But while personal loans are pretty convenient (they let you borrow money for any purpose), and they tend to charge competitive interest rates compared to other borrowing options, like credit cards, there are certain traps you might fall into when taking one out. Here are a few specific ones to try to avoid.
1. Being lured into borrowing more than you need
If your credit is great, you may be able to borrow a sizable amount of money via a personal loan. And if you’re able to snag a relatively low interest rate on that loan, you may be tempted to err on the side of borrowing more than what you need. But that could end up being a dangerous move.
While a personal loan may be a pretty affordable way to borrow money, it’s still debt nonetheless. And the more of it you rack up, the harder it might be to keep up with.
Plus, personal loans may not impose the same exorbitant interest rates that credit cards do, but they charge interest nonetheless. So if you only need to borrow $10,000, don’t take out $15,000 because you’re not being charged an arm and a leg in interest. That extra $5,000 could still end up costing you a lot.
2. Having to borrow more than you need
Putting together a personal loan requires your lender to go through the process of vetting your finances, creating loan documents, and engaging in other such time-consuming administrative work. As such, personal loans generally come with a minimum borrowing requirement that could vary from one lender to another. But that could, in turn, result in you borrowing more money than you need to.
Let’s say the lender you want to work with has a minimum borrowing amount of $5,000 for a personal loan. If you only need to borrow $4,000, you might move forward with that loan anyway, all the while taking on extra debt.
3. Getting stuck with a higher interest rate due to a recent credit score hit
Strong credit could work to your advantage when it comes to a personal loan. But if your credit score recently dropped, you could end up with a not-so-favorable interest rate on the sum you borrow.
If that’s the situation you’re in, and you own a home, you may want to look at a home equity loan instead. Home equity loan lenders do look at credit scores, but the bigger factor they look at is the amount of equity you have in your home. If that number is strong, a lender may be willing to overlook a lower credit score and still come up with a competitive borrowing rate for you.
When you need money in a pinch, a personal loan could be a great solution. Just do what you can to avoid these pitfalls in the course of taking one out.
The Ascent’s best personal loans for 2022
Our team of independent experts pored over the fine print to find the select personal loans that offer competitive rates and low fees. Get started by reviewing The Ascent’s best personal loans for 2022.
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