- Borrowing more than you need. Make sure you decide how much you need to borrow before going to meet with the loan officer. Watch out if the loan officer tries to sell you a bigger loan than you need. Also, sometimes the fees you pay can be part of the loan. This can be good if you don’t have the cash to pay the fees. But it means you have more debt and will have more to pay back.
- Mysterious costs. Look out for costs for things that you don’t understand and might not need. Be sure you understand the costs and benefits of any optional programs like credit protection plans before you decide to enroll. Have the loan officer explain everything to you, and go through the loan agreement to make sure what the loan officer says is what is in the agreement.
| Sometimes to borrow you have to “borrow against” an asset like your home or a car, or the money you have built up by owning that item. This asset is called collateral in the lending world. Loans made against collateral are called “secured” loans. In other cases you can borrow without having collateral. These loans are referred to as personal or unsecured loans. Banks and credit unions offer personal loans for small amounts and do a review of your credit and finances before granting you the loan. A personal loan may be a good alternative to a credit card if you are borrowing either for an upcoming event (a wedding for example), have an unexpected cost or are looking for a lower interest rate than a credit card would have. Costs Just like credit cards, personal loans charge interest and other fees. There can be a fee for getting the loan, and there will always be fees for late payments or missed payments. Also, the interest rate you may increase if you miss payments, so it’s important to pay on time. Often the interest rate you pay will be lower if you arrange for payments to be made automatically from your bank account. Always look at the total cost – the interest rate and all fees – of a loan. And lower payments are not always a good thing. A lower payment can mean that you will be in debt for longer and will end up paying more money in interest. Shop around for the bank or credit unions with the lowest costs for personal loans. Some community based financial institutions may offer small loans of $500 or less. | |