Personal loans can be a great option for those that need an influx of cash very quickly. The best part about personal loans is that you are free to spend them how you wish, as there are no restrictions on spending categories. They can also be more enticing than putting large sums of money on credit cards, as the interest rates on cards can be quite high and you have a maximum credit limit that you can use. Personal loans also get you the money you need quickly, so you do not have to worry about waiting weeks for an application to get approved and funded. If you are looking for the best personal loans, check out Credello’s recommendations for personal loans.
Things to avoid
As with anything, there are a few things that you will want to look for and avoid when taking out a personal loan. If you need money, you certainly do not want to pay more than you have to to get that money.
1. Interest rates
Ideally, personal loans will result in less interest than a credit card, but that does not mean that each lender charges the same. If you do not shop around, you could get stuck with a lender that is charging you significantly more interest than another, which results in much more money paid over the lifetime of your loan.
The average interest rate on personal loans is around 10%, but that can vary based on credit worthiness, amount borrowed, and term length. In comparison, standard APR on credit cards can be as high as 26%, so personal loans can be a great option when you shop around.
Apart from interest, personal loans will charge various fees like origination fees to get it set up. Make sure you are not being charged more than 5% of the total loan amount in fees. If you are, you will likely want to find another lender. Read through the entire loan agreement to make sure you are not getting charged unnecessary or hidden fees.
Some personal loan lenders can actually charge you prepayment penalties if you were to pay back your personal loan quicker than you anticipated. The lender has this in place to ensure they will get all the interest payments they are due, so make sure you understand this prior to agreeing to your personal loan.
The bottom line
Personal loans can be a great option if you have unexpected medical bills, need to pay for a wedding, or even take a luxurious vacation. However, do be aware of interest rates and shop around to avoid overpaying in interest. Apart from interest, you will also be paying fees, so shop around and find a lender that can give you lower fees and avoid penalties at all costs.