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When you need money in a pinch, you have several options to look at. You could rack up a tab on your credit cards and pay it off over time, or you could tap your home equity and borrow against it in loan or credit line form. But another avenue you might pursue is taking out a personal loan.
There are several benefits to borrowing via a personal loan. First of all, you're not restricted in how you use your money. If you want to take out a personal loan to start a business, you can. If you want to spend that money on a luxury vacation, that's your prerogative as well.
Plus, personal loans tend to close quickly. Often, you'll have your money within days of submitting your loan application. And in some rare cases, you may even have your money the day you apply, or within 24 hours.
But while personal loans can be a good way to borrow, there are certain pitfalls you'll want to avoid when taking one out. Here are three to keep on your radar.
1. High interest rates
Generally speaking, you'll be charged less interest on a personal loan than on a credit card. But that doesn't mean personal loans are universally affordable. Ultimately, it's up to each lender to set an interest rate for a personal loan, so if you don't shop around, you could get stuck paying more interest on the sum you borrow than necessary.
Of course, if you need money in a pinch, you may not have all that much time to do that rate shopping. But try to get at least a few quotes from different lenders so you get a sense of what sort of interest rate is competitive given your situation.
2. High fees
Personal loans aren't free. In addition to interest, you'll generally be charged certain fees to put a personal loan into place. Once again, this is where shopping around could work to your benefit, because if one lender's fees are notably high, it might inspire you to take your business elsewhere.
As a general rule, the fees you pay on a personal loan should really not exceed 5% of the sum you're borrowing. If you're quoted a higher number, you may want to find a different lender.
3. Prepayment penalties
Your personal loan may come with a generous repayment period. But what if your financial situation improves and you're able to pay off your loan sooner? That's an option you shouldn't shy away from -- which is why it's important to sign a personal loan agreement that doesn't include a prepayment penalty. After all, why should it cost you extra money to get out of debt sooner?
When you need money, it's worth seeing if a personal loan is a good solution. But if you're going to go that route, make a point to avoid these pitfalls along the way. All of them could end up costing you money needlessly, and that's not something you want.
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