Thinking of getting a personal loan? You might want to take another path.
There may come a time in your life when you need to borrow some money. Maybe you have home repairs you can’t put off, or you need 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 against (or enough equity to borrow).
A personal loan can be a smart way to borrow. But be aware of these personal loan pitfalls.
1. You may need to borrow more than you need
Some personal loans will let you borrow as little as $1,000. But many have a higher minimum — anywhere in the ballpark of $2,500 to $5,000, depending on the lender. The logic is that if a lender goes through the process of checking your credit and preparing loan documents, the amount you borrow must be high enough to make it worthwhile.
Now, if you need to borrow a substantial amount of money, a minimum personal loan may not be a problem. But what if you only need a loan of $750? In this case, a personal loan may not be right for you.
2. Fees can be high
When you take out a personal loan, you don’t just pay interest on the amount borrowed. You may also end up 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.
Origination fees for personal loans vary by lender. Some might charge a 1% lower fee. Or, you could pay 5% (or even more).
Now the good news is that lenders will usually let you roll these fees into your loan rather than asking you to pay them upfront. But that always 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’ll pay on the money you borrow is usually much lower than the interest rate you’ll pay on a credit card. But that doesn’t mean all personal loans offer competitive interest rates. If your credit score isn’t in top shape, you could end up with a higher interest rate, which isn’t much lower than what a credit card will charge.
Many people turn to personal loans when they need money on the fly, and the advantage of personal loans is that they tend to close quickly, which means you can often get your money a few days after the 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 shop around too to be sure you’re getting a good deal.
The Ascent’s Best Personal Loans for 2022
The Ascent team has scoured the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need extra money to make a big purchase, these top picks can help you reach your financial goals. Click here for the full rundown of The Ascent’s top picks.