3 problems with personal loans
There may come a time in your life when you will need to borrow money. Maybe you have a home repair that you can’t delay, or you need the money to buy furniture for your new home. You may be considering getting a personal loan, especially if you don’t have a home to borrow (or enough equity in a home to borrow).
A personal loan can be a smart way to borrow. But be aware of these personal loan pitfalls.
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1. You may need to borrow more than you need.
Some personal loans will allow you to borrow as little as $ 1,000. But many have a higher minimum – anywhere in the roughly $ 2,500 to $ 5,000 stage, depending on the lender. The logic is that if a lender is to go through the process of checking your credit and putting together the loan documents, the amount you are borrowing must be large enough that the effort is worth it.
Now, if you need to borrow a substantial amount of money, a minimum personal loan may not be a problem. But what if all you need is a $ 750 loan? In this case, a personal loan may not work for you.
2. Fees can be high
When you take out a personal loan, you don’t just pay interest on the amount you borrow. You can also find yourself on the hook for expensive fees. Many personal loans come with origination fees, which lenders charge to go through the stages of setting up a loan.
The origination fees for personal loans vary depending on the lender. Some might charge a fee that is 1% lower. Or, you could pay 5% (or even more).
Now the good news is that lenders will usually let you build these fees into your loan rather than having you pay them up front. But that still means borrowing more and having to pay more than you would like.
3. You could end up with a higher interest rate than you would like
A key selling point for personal loans is that the interest rate you will pay on the money you borrow is usually much lower than the interest rate you will pay on a credit card. But that doesn’t mean all personal loans offer competitive interest rates. If your credit score isn’t at its best, you could end up with a higher interest rate, just barely lower than that charged by a credit card.
A lot of people turn to personal loans when they need cash in a pinch, and the great thing about personal loans is that they tend to close quickly, which means you can often get your money back within days of request. Plus, personal loans allow you to borrow money for any reason. But before you get one, read the fine print and make sure you understand how personal loans work and what you’re signing up for. And also shop around to be assured that you are getting a good deal.