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How Personal Loans Work & Common Traps To Avoid When Taking Them



Personal loans are a great way to help people get out of a financial emergency. These are dangerous but useful tools for those who are temporarily down on their luck. Applying for a loan is a delicate process that you need to prepare for in advance. The best advice you can get is to avoid many of the common mistakes people make when taking out a personal loan.

  1. How do you get a personal loan?

If you find yourself strapped for cash and need a short-term boost of financial power, you might consider getting yourself a personal loan. You can take out a loan for any number of reasons or no reason at all, as long as you have some kind of collateral that you can offer the lender. This collateral could be anything of financial value, whether it’s a car or your own saving account. Strangely, there are even places that you can get a personal loan without any collateral at all.

The money from the loan can come from just about anywhere. Banks, credit unions, and online lenders offer personal loans to those who they believe can pay them back. Some lenders are more credible than others, which is why you need to do your research before signing any kind of agreement.

  1. Settling for the first choice

When it comes to borrowing money, there’s no shortage of lenders out there. Your own city might have hundreds of lenders in the form of banks and credit unions. Limiting your search to the first couple of options that you come across is considered a big mistake. If you don’t check out all of the potential lenders you can find, you might miss out on a better deal.

Borrowers tend to look at their own banks first. This is understandable, as they already have a well-established financial connection to it. Your current bank holds all of your accounts, so why not streamline the process and take out a loan from them?

The truth is that your bank won’t offer you a better deal simply because you’re a loyal customer. The only thing they look at is their own policy and your credit score. It would be best to check with as many options as possible before making your decision.

  1. Applying for too many loans

Before you are able to secure a loan application, the lender will first have to check your credit score and history. They need this information to find out how well you’ve handled your finances before signing up for your newest loan. There are a lot of financial decisions and moves that can affect your credit score.

What you may not know is that the simple act of having a lender check your credit score could raise suspicions about your financial situation. Too many lenders looking up your credit score within a short period of time will make it look like you are desperate for a loan, which can’t be good news for your finances. This will lead to lenders giving you much worse rates for your potential loan, even if the rest of your finances are well-managed. It might even decrease your chances of getting a loan at all.

  1. Not reading the fine print

Personal loans are legally binding documents. When you decide to sign one, you want to be absolutely sure that you understand all of the terms and conditions that go along with it. This means that you should read the whole document back to front, while also paying close attention to the fine print.

Lenders can insert any number of shady clauses into the agreement and these could potentially affect how well you are able to pay off the loan. Their main goal is to collect money from the interest you owe, which is why they might include clauses that prevent you from paying rates off early. Such clauses are called pre-payment fees and they can really hamper you from getting rid of your debt. Origination fees should also be noted, as they increase the amount of money you pay upfront for the loan.

  1. Being late on payments

It might seem like an obvious thing to say, but you shouldn’t be late on your payments for any loan. This type of sloppy money management can cause issues with your financial score. If you’ve done the math correctly and you can regularly pay the rate, you should set aside part of your paycheque every month just for this purpose. This will prevent you from spending that money later on only to realize that you don’t have enough left over to pay the rate.

Missing a payment or even being late on your payments will cause your credit to suffer. If your loan agreement specified fees as a consequence for late payments, you could end up paying even more money than you would have paid for the rate alone.

When you’re dealing with a secured loan, things can get ugly fast. These types of loans are a lot stricter than others and even a single missed payment could lead to you losing your collateral to the lender.

  1. Lying on a loan application

In order to get the best rates out of your personal loan, you have to present the best possible financial picture of yourself. The lender would prefer it if you had a stable job, a high income, and good credit. These factors have a significant impact on the kind of rates you can get. So, what if you decided to embellish your financial situation a tiny bit?

Would it hurt if you rounded up some numbers from your paycheque or neglected to mention that your job is only part-time? Yes, it would have significant consequences. Lying on your loan isn’t just a surefire way to get declined once the truth comes out, it’s also a one-way ticket to massive fines and jail time. It’s considered fraud and you don’t want to get caught omitting the truth. Your best course of action is to stick to the truth, even if it leads to some less-than-favourable rates on your loan.

  1. Underestimating the interest rates

A lot of people take out a personal loan without considering the financial ramifications of one beforehand. Are you able to pay off the loan’s monthly rates with your current finances? The rates are a constant burden on your finances and they quickly become another expense at the end of the month which is why you have to take them into account when securing your loan.

If the loan rates are above your repayment capacity, you might have to consider other borrowing options. You don’t want to find yourself in a situation where you can’t pay the rate, because the interest will eventually catch up to you and you’ll only dig yourself deeper into debt.

  1. Not disclosing current debts

If you’re already paying off another kind of loan, you should disclose this information to the lender that you approach for a new one. If you keep it hidden and they end up finding out, you could receive a penalty in the form of higher rates. On top of everything, taking out yet another loan will have a significant impact on your monthly budget.

However, there are some types of loans that are specifically designed to take care of repayments from previous loans. These are called debt consolidation loans and they can help you combine multiple debts into one, more manageable debt. One of the reasons they are used in these situations is that they offer better rates that are spread out over a longer timeframe, which would allow you to pay off the debts with less pressure.

Before you decide to take out this type of loan, you should consult experts like OurMoneyMarket to see what you’re getting yourself into. If you find that the rates of a debt consolidation loan are favourable and that it can take some of the financial pressure off of you, then one of these loans might just be the solution to your problems.

  1. Hiding it from your family

Personal loans are a huge financial responsibility that affects everyone in your household. The EMI payments will take away from your monthly budget and it’s only right that your spouse and family know why this is happening.

Ideally, you should consult your spouse before making any major financial decisions that involve both of your finances. Review the reasons for taking out the loan and consider alternative options alongside them. If they have a good suggestion for an alternative, hear them out. Ultimately, it’s a decision that will have a lasting impact on them and they should voice their opinion on the matter.


Personal loans are nothing to be toyed with. They have a huge impact on your finances and they should only be used with caution. As long as you’re sure that you can make the monthly payments, you can enter into an agreement with a reputable lender. Avoid any unnecessary mistakes and the loan will help get you out of a financial tight spot.






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