How Personal Loans Work and Common Traps to Avoid

1/10/20 Ricky Baizas

A personal loan can be a great alternative to credit cards and a great way to build up your credit. But it is important to do your research to learn whether the loan you apply for is the right fit for your needs.

How personal loans work

Personal loans are different from business loans because they are more risky for the lender. If a borrower defaults on a business loan, the lender can potentially take possession of the borrower’s personal property as collateral. If there is a default on the personal loan, however, the lender is left with nothing. Therefore, personal loans can have higher interest rates and stricter terms that protect the lender. With this in mind, it is important for the borrower to understand how to protect themselves.

Here are some things to avoid

  1. Not doing research. There are hundreds of personal loan options. In order to figure out the right one for you, ask yourself, why are you getting the loan? Is it to cover bills for a month because you are a little short on cash? Is it to make an investment in your home to increase its value? Is it to pay for your summer vacation? Each situation is different and the terms of the loan agreement should be in alignment with your specific situation. For example, if you plan to repay the loan quickly, then a small short-term high-interest rate could be an option. Or if you know that your income situation fluctuates, then you want to read the fine print regarding penalties and late fees.
  2. Not reading the fine print. A good rule of thumb is don’t sign what you don’t understand. Read the document, ask questions, consult a qualified person you trust to help you interpret complicated terms, or ask the loan representative for a summary of the loan agreement terms. If this loan has terms that are unfavorable towards your needs, feel to shop around with other lenders. There are plenty of other choices.
  3. Not knowing your credit score. Credit scores range from a poor rating of 300 to an excellent rating of 850. If you have a really good credit score, then you may be eligible for a lower-interest loan. If your credit score is less than desirable, then a personal loan can actually be used to increase your credit score if you follow good financial habits.
  4. Missing or late payments. This may sound basic, but missing or late payments to creditors can wreak havoc on your credit score. This could also ruin your chances of you being qualified for future loans or credit opportunities.
  5. Not checking your credit report. Have you been declined by a loan company recently even though you know you have been practicing good financial habits? Have you checked your credit report lately? There could possibly be mistakes and charges listed on there which you are not responsible for and are negatively impacting your credit score. You are eligible to receive a free credit report from each of the 3 major credit reporting agencies once a year. Contact ExperianEquifax and TransUnion for your free report.
  6. Emotional decisions. Sometimes when consumers are seeking personal loans, emotions can cloud good decision-making. They may be desperate for cash for an emergency situation with a family member. Or they could have high emotions as they seek funds for wedding planning. When we are in an emotional state, we must take a moment to ask ourselves hard questions. How do I plan to repay the loan? When can I realistically repay the loan each month on time? Is this personal loan the right one for me? It may be good to bring along a trustworthy friend or family member who is not emotionally involved in the process.

Overall, a personal loan can be a wonderful option to help you through life’s unexpected financial challenges. Taking the proper precautions, doing your research, and knowing your core reasons for obtaining the loan can help make finding personal loan a good financial experience.

If you would like to jumpstart your efforts, consider a personal loan from LoanMe. You can speak to one of our agents about the benefits of a personal loan from LoanMe, such as lowering your fees by consolidating debt, and the possibility of receiving the loan in under 5 hours.


better business bureau logo
consumer affairs logo shield
trustpilot logo
  • personal loan