- Personal loans are a convenient way to borrow money.
- While they tend to offer competitive interest rates, there are some traps you might fall into.
Why pay more than you have to?
If you need to borrow money, there are different ways you can go about it. You could charge up a higher balance on your credit card, especially if you haven't yet come close to reaching your spending limit. But doing so could mean signing up to pay a ton of interest, not to mention wrecking your credit score by having too high a credit utilization ratio.
Another option is to take out a home equity loan or line of credit (HELOC). But that only works if you actually own a home, or one you have a decent chunk of equity in.
That's why you may find that a personal loan is your best option for borrowing money. With a personal loan, you can borrow for any purpose, whether it's paying off a credit card, renovating your home, or starting a business. And, personal loans tend to offer competitive borrowing rates -- rates that are far more attractive than what a credit card will typically charge.
Plus, personal loans tend to close quickly. In some cases, you might have your money in hand within days of applying for one.
But if you're going to get a personal loan, it's important to avoid getting taken for a ride. And if you make these three key moves, that shouldn't happen.
1. Shop around
Any time you're looking to borrow a notable sum of money, whether it's a mortgage, an auto loan, or something else, it's important to explore your options rather than land on the first offer you get. Well, the same holds true for personal loans. You never know when one lender might have a better deal to give you than another, so take a little time to do your research before accepting an offer.
2. Check your credit score before you apply
Personal loans are unsecured. That means they're not tied to a specific asset. Rather, qualifying for a personal loan -- and snagging a great rate on one -- will hinge on how trustworthy a borrower a lender thinks you are.
That's why it's important to check your credit score before applying for a personal loan. A score that isn't so great could lead to a higher interest rate on a personal loan because your lender is taking on more risk. But if you see that your score needs work, you might make the decision to hold off on applying for a loan until you're able to boost it.
3. Ask about fees
Just as fees (known as closing costs) come into play when you sign a mortgage, so too can you expect to pay them to finance a personal loan. Make sure to ask what those fees will entail. If they're notably high, you may want to work with a different lender.
For context, with a personal loan, you really shouldn't incur fees that exceed 6% of the sum you're borrowing. And it's not unheard of to enjoy lower fees in the 1% to 2% range, depending on your lender.
A personal loan can be an affordable, convenient way to borrow. Just be sure to avoid these pitfalls that could easily leave you paying more.
Our picks for the best personal loans
Our team of independent experts pored over the fine print to find the select personal loans that offer competitive rates and low fees. Get started by reviewing our picks for the best personal loans.
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