You don’t want to end up with the wrong lender for your needs.
- There are many different lenders who offer personal loans.
- Rates and terms may vary from lender to lender.
- Borrowers should be on the lookout for disadvantageous terms when shopping for a personal lender.
Personal loans can be a great borrowing tool because of the flexibility they offer. You can use your loan proceeds for almost any purpose and can often earn a lower interest rate than other common types of consumer debt such as credit cards.
But getting the right personal loan is important if you’re considering borrowing money using this approach. And to do that, you need to be on the lookout for four red flags when selecting which lender to borrow from.
1. A high interest rate
The most obvious red flag that should deter you from taking out a personal loan from a particular lender is a high interest rate.
You see, the higher your rate, the more expensive your loan will be over time. A higher rate also means that you will have to cover more interest each month, which will increase your monthly payments.
Rates can vary from one personal lender to another, and the only way to know if a particular lender is offering a prohibitively expensive loan is to shop around. By getting multiple quotes, you can immediately identify which lender, if any, is charging you too much interest and you can cross that lender off your list.
2. A long return time
Sometimes lenders will make monthly payments affordable by extending your personal loan repayment term. Unfortunately, a long repayment period can trap you in debt for years, interfering with other financial goals. You could also end up paying a lot more interest than necessary if you extend your repayment schedule.
To make sure you spot that red flag, compare repayment periods — and total borrowing costs — with different loan providers. If a loan seems cheaper due to lower monthly payments, but has simply extended your repayment time, you may want to go with another lender.
3. High upfront costs
Some personal lenders charge an application or origination fee, while others do not. Paying a lot of money up front just for the privilege of borrowing can make your loan much more expensive. You don’t want to be hit with unnecessary fees, so watch out for them when comparing loan terms.
4. Penalties for prepayment
When you take out a personal loan, you want the flexibility to be able to prepay it if your finances allow. Therefore, you should look carefully to see if any lender you are considering will charge you a penalty for prepaying your loan.
Since there are many lenders that allow you to pay off your loan sooner than expected without financial consequences, there is usually no reason to choose one that adds this cost if you hope to become debt free longer. early.
By watching these four red flags, you can hopefully find an affordable loan that you will repay in a reasonable amount of time, and that is the best loan for your needs.
The Ascent’s Best Personal Loans for 2022
The Ascent team has scoured the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need extra money to make a big purchase, these top picks can help you reach your financial goals. Click here for the full rundown of The Ascent’s top picks.