A personal loan can help you bridge a cash shortfall until the next paycheque. However, it is important to take out personal loans responsibly. Discover the seven common mistakes people make when taking out personal loans and how to avoid making those mistakes.
1. Not Reviewing Your Financial Situation
Before you apply for a loan, it is important to take stock of your financial situation. Determine your total monthly income as well as your typical monthly expenses. Factor those in when you assess your ability to repay the loan. Understanding your financial situation intimately is the number one prerequisite to being a responsible borrower and getting what you need out of the borrowing process.
2. Ignoring Eligibility Criteria
The eligibility criteria for taking out a personal loan are usually straightforward. Typically, you need to be 18 years of age or older, a Canadian citizen or permanent resident, and have a stable income. Make sure to check all the relevant requirements stipulated by the lender of your choice. If you do not feel that you meet the criteria, consider alternative options.
3. Not Understanding Loan Terms and Conditions
Another common mistake people make is not reading the loan terms and conditions. Familiarize yourself with the terms and conditions of your loan before you finalize the agreement. While reading terms and conditions may not be fun, it will help you make informed choices and avoid costly mistakes.
4. Taking Out a Larger Loan Than You Need
Only take out the amount of money you need to cover your urgent expenses. It is never a wise idea to over-borrow. A larger loan will entail higher interest payments and higher payments overall. Consider what payment will fit your budget and the minimal amount you need to pay for your expenses and stick to that amount.
5. Failing to Keep Up with Payments
A lender may report your payment history to one or more credit bureaus. Therefore, late payments, missed payments, or non-payment of your loan can negatively impact your credit score. A lower credit score may affect your ability to obtain favourable terms on future loans or even qualify for a rental or a mortgage. To monitor your credit score and automatically catch any mistakes on your credit report, sign up for Credit Verify! The registration process takes only a few minutes.
6. Not Including Fees and Interest in Budget Calculations
If you’ve read your loan terms and conditions, you must be aware that a loan will entail certain fees and a certain interest rate. You need to take the fees and interest rate into consideration when determining your budget and your ability to repay the loan. This will help you get an accurate picture of your repayment capability and whether taking out a particular loan is right for you.
7. Taking Out Too Many Loans at One Time
Another mistake people make is taking out too many loans simultaneously. Typically, lenders give preference to borrowers who don’t have too many loans out at the same time as borrowers with fewer loans may have a higher ability to repay their loan(s). Each personal loan comes with interest and fees, so it will be more difficult to repay multiple loans at once. Try to limit your borrowing to what you strictly need to cover your immediate cashflow needs.
The Bottom Line
Being aware of common personal loan mistakes will help you borrow responsibly. If you need to cover immediate expenses, apply online via Friendly Lender. We do not check your credit score or credit report during our simple and quick online application process.
