Don’t Sign Yet! What to Know About Personal Loan Contracts Before the Dotted Line
Given that around 80% of Americans are currently in debt, signing a personal loan contract is a familiar experience for millions of Americans.
However, if you’re about to sign up for a new loan or your first personal loan, you need to consider everything there is to know about them before you sign.
Here are five things to know before you put your name on the dotted line.
1. Figure Out How They Work
Personal loan contracts aren’t complicated but they’re not quite like every other loan out there. Personal loans are usually an installment loan, which means that you get a fixed amount of money.
This is often distributed in a lump sum, while you’re required to repay it in increments over a set period of time.
The life of your loan varies anywhere from a year to 84 months. Follow the rules, pay back your loan and its associated interest, and your account is then closed.
If you find that you need more money, you’ll have to apply for a new loan later on.
Think about why you need the money before you apply. One of the most common lending situations entails people taking out more money than they can afford because they qualify for it.
If you’re not loaning for the right reasons, you’re more likely to take out more money than you should instead of just saving up to spend the cash.
Personal loan contracts can range from anywhere between $1,500 and $100,000. You need good credit to get up into the five-figure range, but with damaged credit and a stable job, you might be able to get more than other people would.
2. Choose the Right Type
Before you sign on for a personal loan, you need to ensure that you’ve chosen the right type of loan. Choosing the wrong type of loan means that you’ll have access to less money and be under stricter conditions for taking out money and paying it back.
A secured loan is a type of loan backed by collateral, meaning that you have some kind of asset that proves you’ll be able to pay the money back. Your security for loans like that could vary from a car to a house, a CD, or a savings account.
If you can’t make your payments, then a lender has the right to take your asset to pay back what they’re owed, under fair conditions.
An unsecured loan is one that doesn’t require a specific asset to be attached to it.
That means that you’re trusted by whatever lending institution to pay back the loan on your own. While they often have higher interest rates than secured options, they often have more liberal terms than secured loans.
3. Go to the Right Place
When you’re looking for a personal loan, most people head to a bank first. However, they’re not the only place that offers these types of loans. There are a wider variety of institutions than ever that offer personal loans to help you when you need it.
Credit unions and consumer finance companies are other types of alternative lenders. While they don’t have as much money to throw around as large banks, they have other benefits that banks don’t have.
They’ll offer terms that are more friendly to people like you, especially if you’re part of the local business ecosystem or an engaged community member.
Online lenders are a new way to get money from lenders that have fair terms.
There’s a lot of peer-to-peer lenders that offer loans to people who need them on a short-term and user-friendly basis. If you’re looking to get a loan from a small lender looking to help build up their community, peer-to-peer lending is the way to go.
To learn more about your options in lenders, read more here.
4. Watch Your Credit Score
When you take out a loan, you’re looking at potential changes to hit your credit score. In fact, before you even get your loan you could be looking at changes to your credit score.
Every time your credit score is looked at, it’s called an inquiry, and it changes your credit.
Usually, this is called a “hard inquiry” and typically it takes your credit score down a notch. You can recover from this hit pretty quickly but it’s still something to think about before applying for a loan that you don’t need.
Hard inquiries end up on your credit score for a couple of years but then get erased.
While you’re shopping for credit with a bank or a company that you already have an account with, you’ll have your credit looked at. These reviews don’t impact you the same way.
These “soft inquiries” don’t impact your credit score, so look for companies that do a soft pull rather than a hard pull.
5. Become Interest Rate Literate
As you probably know, a loan for $1,000 costs you more than $1,000. Often these loans cost you around 15 percent more than you took out, but the rates range from 5 percent all the way up to more than 33 percent.
The longer your loan’s terms are, the more you’re going to end up paying in the end.
There’s also usually a fee just for taking out your loan. This “origination fee” costs up to 5 percent of your loan. That cost, just for processing the loan, should be accounted for when you first take out your loan.
When you repay your loan, you may even be subject to prepayment fees. Paying it too early could cost you more than you bargained for.
A Personal Loan Contract is Serious Business
Before you sign a personal loan contract, you need to think carefully about your financial future.
One personal loan gone wrong could drive your credit into the ground. Make sure you’ve learned everything you need to know to ensure that your next loan helps you reach your goals rather than driving you into debt.
Check out our latest guide to find out how these loans help you reach your goals.