A necessity or a bad idea?
If you’re a business owner, you’ve been there. You have a great idea and plan to take your startup to the next level, but you’re running out of money to do it. You have no credit history and no collateral, so you cannot get a bank loan. And you don’t have any keen friends or family [â¦]
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April 30, 2021
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This story originally appeared on ValueWalk
If you’re a business owner, you’ve been there. You have a great idea and plan to take your startup to the next level, but you’re running out of money to do it. You have no credit history and no collateral, so you cannot get a bank loan. And you don’t have friends or family members willing or able to give you a loan. Your credit rating is pretty bad, and you can’t get a personal loan from anyone either.
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Things to watch out for when obtaining a personal loan
Instead, you find yourself turning to a “personal loan” from an online lender. What seems like an easy fix quickly turns into a puzzle that will last for years if you don’t know what you’re getting yourself into.
When you borrow money with a credit card, you have the freedom to take the time you need to pay off the loan. With a personal loan, you agree to repay a fixed amount in regular installments. These payments are usually due every two weeks or every month and range from $ 25 to $ 100 or more, depending on your loan amount and the length of your repayment period. Typical loan terms vary from 12 to 60 months, but no matter how much you receive, your payments will be the same.
In exchange for the convenience of having a fixed payment schedule, personal loans generally charge a higher interest rate than credit cards. In fact, lenders generally have no recourse in the event of default on a loan. You’ve already guaranteed that you’ll make regular payments, but your lender can’t pursue your credit score or take legal action to recoup their losses if you fall behind. This means that they have to charge higher interest rates if you default on your loan.
In addition to the interest you have to pay on a loan, many personal loans require you to pay an origination fee to cover the loan processing costs. In many cases, the origination fee can vary between 15% and 6% of the total loan amount. You have to pay the origination fee up front when you take out the loan, rather than paying it back over time as part of the monthly repayments. The level of your origination fee is one of the main differences between personal loans for good credit and personal loans for bad credit. If you have a good credit rating, lenders may be willing to give you a personal loan without any origination fees. However, if you have a bad credit rating, many lenders will ask you to pay an origination fee to cover the costs of processing your loan.
If you have a bad credit rating, you need to understand how the origination fee works on your personal loan. If your credit check is expensive or your total debt ratio is high, the lender could charge you significantly for their problems. In some cases, this could be enough to increase your monthly payments by hundreds of dollars per month.
Higher interest rates
If you already have good credit, a personal loan usually carries a lower interest rate than other types of loans. But if your credit rating isn’t good, a personal loan could cost you dearly in interest. It could even cost more than a credit card. In particular, unsecured personal loans tend to cost more than other types of installment loans, such as home equity loans.
Long application process
Personal loans are often much faster to apply than credit loans. But you still have to go through the formal loan application process, which can be lengthy and time consuming if you don’t have the required documents.
Personal loans are a good option if you intend to consolidate your debt. But this is not a permanent solution as all you have done is cycle debt and transfer it from different sources to one source, your personal loan. Remember that you will always be paying interest on the personal loan.
Penalties for early payment
When you borrow money with a credit card, you can avoid paying interest by paying the full balance once you can afford it. But that’s not always the case with a personal loan. Many lending institutions will charge a prepayment penalty if you pay off your loan early so they can make up for any interest they miss.
When applying for a personal loan, it is important to weigh the pros and cons and research the comparison interest rates. You can figure out what you need and what is best for you.
It’s very easy to defer paying bills and charge them to your credit cards. However, this is not an option that most people should take, as a personal loan is a short term solution for larger debts and should not be used for long term expenses. People who plan to use the money for long-term expenses like insurance or a mortgage should look for other ways to pay off their debts. Ultimately, you should always avoid taking out a loan and use other means to pay your bills instead.