Have you ever experienced an unpleasant surprise when a bank or financial institution increases your installment for a housing or consumer loan without knowing the real reason? If there is any consolation for you – it happens to many. Therefore, before entering a credit adventure, you should be well acquainted with the provisions of the contract you are signing.
There are financial pitfalls when taking a loan – and to avoid them, it is necessary to study each item of the contract and not sign it unless all ambiguities are removed. We will draw your attention to 5 common traps to avoid when taking a personal loan.
Different Conditions For Obtaining And Repaying A Loan
While some banks and credit institutions raise interest rates on loans that citizens repay in large numbers – others offer various possibilities of so-called refinancing: taking a new loan to repay the old one. People are recalculating, and experts warn us to open our eyes well and take the calculator in our hands – because interest and various additional costs can be a new trap and noose for the household budget.
Things You Should Pay Your Attention To
What you should pay attention to when borrowing is paying a penalty for terminating an existing contract. Then the amount of the effective interest rate – which gives the right information about the price of a loan. There is also the so-called indexation if the loan repayment is linked to a foreign currency.
What is the difference between a fixed and a variable interest rate? What does this practically mean and what problems can we encounter when repaying a debt? You have to find the right answers to some of these questions if you want to know how to avoid traps when taking a personal loan.
What Is A Personal Loan?
When we talk about personal loans and credits – there is a difference. Loans are primarily approved by banks, and it is understood that loans bring with them interest rates – which are very often unfavorable.
On the other hand, when we talk about a personal loan, it does not have to but most often involves interest – but the procedure of obtaining a personal loan is greatly facilitated by clients. You can get a personal loan from a bank, but also other financial institutions or private creditors.
How To Repay It?
In both cases, you return the money in monthly annuities, with the fact that the period for bank loans is usually longer – and therefore less favorable due to the interest that accompanies a long repayment period. On the other hand, a personal loan usually involves slightly smaller amounts, slightly lower interest rates, and a shorter repayment period – which is good because it won’t overburden you.
Also, personal loans can be approved with a slightly worse credit rating, with a shorter paperwork procedure – but it still requires certain guarantees. Most personal loans are unsecured, but the loan is backed by something you own. Although this type of loan is “cheaper” – you can lose the property if you do not repay it regularly.
What Traps Should You Avoid?
When we decide to take a personal loan, we should find out all the details – that is, the advantages and disadvantages of such a decision. If you want to learn more about personal loans, find all the details on this website – and when we talk about the pitfalls of such decision-making – we must first start with ourselves. Because in fact, the biggest traps lie in ourselves.
1. Insufficient Research
The fact is that a personal loan can be a good solution to some unexpected financial difficulties. You can get it quickly because the procedure is not extensive – and money can be found in your account within 24 hours to 5 working days.
However, you have to be careful. Today we live in the era of modern technologies and the Internet that make our job easier – but also provide opportunities to be victims of fraud.
Therefore, before entering into a personal loan – you need to research the terrain well. First of all, make sure that the financial agency with which you are looking for a loan is reliable. On the other hand, research well all the conditions under which a loan can be granted to you because the terms of the loan may vary.
The loan offered to you should and must be in line with your needs and repayment options – and this is what you need to keep in mind when researching.
2. Careless Reading Of The Loan Agreement
At no cost, you shouldn’t sign a contract that is not clear to you. If there are any ambiguities – contact a qualified person who can help you interpret each clause or ask for a summary of credit terms for inspection. If the loan you are interested in has conditions that are not favorable for you – look for a loan elsewhere. There are plenty of choices.
3. You Must Find Out More About Your Credit Rating
In general, a credit rating can range from a bad rating of some 300 – to an excellent rating that is usually over 800. If your credit rating is good, you may earn a lower interest rate when borrowing. If your credit score is lower than desired – then using a personal loan can even improve your credit score if you have good financial habits – or if you repay your debt regularly.
4. Poor Payout Dynamics
Although this seems to be a basic prerequisite, many of us are prone to mistakes. Some because of insufficient understanding of the contract, and some because they did not assess their financial capacities well.
So from the start, you have to be careful not to fall into this trap as it can be very dangerous. Not only because of your credit rating – but you can also be left without assets in case you do not pay off your debt in full. Certainly, if you are an irregular payer, it will create a negative image in your credit score, thus reducing your chances for future loans and other credit opportunities. Also, checking your credit score is important because of possible procedural errors that can sometimes happen through no fault of your own.
Therefore, you should know that you have the opportunity to check your credit score once a year with one of the credit reporting agencies.
5. You Shouldn’t Make Emotional But Rational Decisions
Sometimes it happens to us that due to certain life situations we make decisions due to emotions and sudden – without thinking much about the consequences of such decisions. This is one of the common traps we fall into when taking a personal loan. However, the advice is to wake up in time and ask yourself: Can I realistically repay the loan I took? How do I plan to repay this personal loan? Therefore, it might be a good idea to have a “voice of reason” – that is, a trusted person to help you make a rational decision.