If you’ve been considering taking out a loan, you’re certainly not alone. Reports from the financial sector show borrowing is on the rise in a variety of categories, including student, personal, debt consolidation, automotive, mortgage, payday and title loans. While these are all helpful options for consumers to have at their disposal, they’re also leaving a growing number of people with unmanageable debt.
Taking a Look at the Current Issue
According to one source, Americans’ debt levels are increasing with each passing year. In fact, 34.3 million people were in the process of paying back existing personal loans alone at the end of last year, and an additional 6.1 million had taken out new personal loans over the course of the year. These loans amount to a grand total of $291 billion, and other types of loans weren’t included in the final figure.
Being Proactive in the Lending Process
Countless consumers are finding themselves in over their heads after taking out a loan. Consider the following potentially dangerous loan mistakes before jumping into a borrowing contract. Doing so could save you a great deal of money and hassle in the long run.
1) Not Understanding the Options
Numerous types of loans are available these days. Each one has its own distinct set of benefits and disadvantages. Payday, or cash advance loans as they’re often referred to, are typically available immediately and can be immeasurably valuable when it comes to covering emergency expenses. That being said, they also come with lofty interest rates and short repayment terms. You can look at debtconsolidationusa.com to learn more about this alternative, but these are the most basic points.
Studies show an unexpected expense of just $400 could place millions of Americans in a state of financial hardship. Though a cash advance could cover such an outlay, paying it back with interest and other fees could easily ramp up the monetary difficulties.
Debt consolidation loans are geared toward those who are looking to eliminate numerous credit cards or reduce the total amounts of interest they’re paying on credit cards and other existing loans. Still, many enter into loans with terms and interest rates that appear to be attractive on the surface only to discover they’re actually paying more over time than they originally would have. These are only a few examples of the importance of researching and fully understanding the options available to you.
2) Not Investigating Your Credit Score
It’s no secret credit scores can have a significant impact on the loans consumers are eligible for as well as the interest rates available to them. Generally speaking, the lower the credit score, the more difficult it will be to find a loan and the higher the interest rates will be. Far too many people believe their credit scores fall into the “good” or “excellent” range only to find they’re actually much lower on the scale.
Be sure to look into your credit score and report before setting out in search of a loan even if you’ve never had any issues in the past. Since no person, store or agency is invulnerable to errors, inaccurate entries and other mistakes can negatively affect your score without your knowledge. If any blunders are found on your credit report, consider clearing them up before applying for a loan. Taking this extra step is bound to work out in your favor.
3) Failing to Shop around
In many cases, people prefer to turn to banks or credit unions with which they already have accounts for loans. Lenders are known to offer better interest rates and terms to account holders who are in good standing and have suitable credit histories. Still, they may not be able to offer the lowest possible interest rates.
A number of sources are out there, from online lenders to brokers with vast networks of prospects. At least one of them may have the capacity to offer even lower interest rates than your current bank. Depending on the amount and duration of the loan, an increased interest rate of even one percent could ultimately cost you hundreds to thousands of dollars over time. Taking the extra time and effort to shop around could definitely pay off.
4) Overlooking the Fine Print
Most loans come with certain additional costs on top of their interest rates. Origination and underwriting fees are a couple of prime examples. These can range from one to six percent or more. An extra fee of six percent on a $2,000 loan amounts to $120. This means either you won’t get quite as much money upfront as expected or will end up paying back a bit more than bargained for.
5) Taking out an Unnecessary Loan
Having significant amounts of money at your disposal can certainly be tempting. Who wouldn’t want to go on a shopping spree, purchase a new vehicle or take a spur-of-the-moment vacation? Taking out a loan simply because you can rather than saving it for more productive purposes can easily come back to haunt you in more ways than one, though.
6) Borrowing More than Needed
Along the same lines as taking out a loan when it’s not necessary, borrowing more money than you need can certainly cause its fair share of issues. Excessive fees and mounting interest are only a couple of the possible issues to ensue. Having extra money can also lead to frivolous spending habits, which may negatively affect your financial situation in several ways.
7) Borrowing More than You Can Afford
Hundreds of thousands of people simply fail to sit down and do the math before taking out a loan. They assume that if they’re approved for a specific amount of money, they’ll be able to cover the monthly payments. Figure up your total monthly expenses, set aside some extra money for emergencies, add in the amount you’d be paying each month on the loan, and weigh all that against your income. Keep in mind, unexpected job losses or pay cuts will alter the equation.
All Things Considered
Loans can provide opportunities to purchase homes, upgrade to newer vehicles, make home improvements and pay off debt ahead of schedule, but they can also lead to financial hardships. Be sure to dig deeper before signing on the dotted line. Research the various loans on the market, explore the potential lenders available to you and know your credit score ahead of time. Also be sure you actually need a loan and aren’t borrowing more than you need or can afford to pay back. All these measures will help ensure you don’t end up over your head in debt because of a loan.