5 Mistakes to Avoid when Applying for a Personal Loan

5 Common Mistakes When Applying for a Personal Loan (And How to Avoid Them)

Taking out a personal loan can get you out of a financial jam. It can solve an immediate problem, help you make a purchase you couldn’t otherwise have afforded, or allow you to consolidate debt. When you borrow money, you want it to solve a problem and not create bigger ones. Whether you are new to borrowing money or have done it before, we’re going to go over five mistakes you want to avoid when applying for a personal loan. 

We’ve spent years in the lending industry. We studied the personal finances of thousands of individuals as well as company lending policies. And we track hundreds of companies that provide credit. We want to use that experience to help you avoid some common mistakes people make when they apply for a personal loan. 

Mistake: Borrowing more than you need

I’ve seen too many people succumb to the temptation to take out more money than they really needed. Admittedly, some did it because it allowed them go shopping, but most of them had decent rationale when they did it. Some people borrow more than they need because they want a financial cushion. They are afraid that if another unexpected expense hits them, they will be completely undone. So, they take extra money that they can tuck away in their savings account…just in case. Some people borrow more than they need because the lender will not lend below a certain amount. 

These aren’t “bad” reasons to borrow more than you need, but you should still avoid them because it means a bigger monthly payment than is necessary and paying more interest over the long run. Both of those things can cause your finances to be less resilient. They can actually create the problem you are trying to avoid. 

If you feel like you need a cushion, consider a line of credit. If you need less money than people are willing to lend, there are two solutions you could pursue: first, you could keep shopping around. Or, second, you could borrowing the higher amount and make an immediate principal payment for the excess. That means you won’t be paying interest on that money and you will repay the loan much faster.

Mistake: Ignoring the Details

It’s human nature to see the finish line and sprint toward it. When we need to solve a financial problem and we get approved for a loan, we just want to move on. The last thing we would want to do is to start the process over again. So, too many of us skip reading the terms and conditions. I have met too many people who didn’t even realize that they were accepting a loan with bi-weekly payments when they thought they were monthly payments. That meant that the loan ended up extracting twice as much from their monthly budget as they expected.

Even if you aren’t making that kind of error, there’s real value to reading through the details. Knowing exactly how things will work will make it much easier for you to be successful with the loan. In evaluating the loan offer, look at the following things:

• Total payment amount: Make sure you know what your total monthly obligation will be and that you can afford that in your budget. 
• Interest rate: Is the interest rate fixed or variable? Personal loans tend to have fixed interest rates and revolving credit like credit cards and lines of credit tend to have variable rates. Compare the APR with other offers you’ve been approved for. But, just because the APR is lower, it doesn’t automatically mean that the loan is cheaper. That’s why you need to look at the…
• Total interest expense: All legitimate lenders will give you the details of the loan in what is called a TILA box. It will include the APR, the total payments, the total interest, and the loan term. If your APR is lower, but the total interest that will be charged is higher, that means that you have a longer…
• Loan term: The loan term, or the repayment period, will have implications on how long you are in debt as well as how much interest you end up paying. A longer repayment term will mean a lower monthly payment, but higher total interest paid. You should always take the lowest term length that you can comfortably afford. 
• Origination fee: An origination fee on a personal loan is usually a percentage of the total loan amount. It is taken out of the proceeds of the loan. The origination fee is accounted for in the APR, so a low APR with an origination fee just means that the interest rate is lower. But, you won’t get a reimbursement on your origination fee if you pay the loan off early, so it’s nice to have a low origination fee to incentivize paying the loan off early. 
• Fees: Most lender charge a late fee, but the cost can range from $10 up to $39. And some lenders have grace periods. Some lenders also have non-sufficient funds fees that they will charge you if they attempt to take a payment and it fails because you don’t have enough money in your account. If you are looking at a line of credit, you will also want to see if there are any account maintenance fees. Did the lender add unnecessary insurance costs to the loan, like employment insurance or coverage for collateral? Make sure you understand all the ways the loan could cost more than you expect. 
• Payment flexibility: See if the lender offers options for changing your payment date or skipping a payment during financial hardship. A lender that has policies in place for flexibility can make repaying the loan much easier and keep a new financial emergency from creating a domino effect on the rest of your finances. 
• Collateral: If your loan is secured, try to understand what kind of claim that the company can make on your collateral. Will they repose the collateral? Foreclose? Put a lien on the property? Make sure you understand the implications of the loan.
• Discounts: Some lenders will offer APR discounts, but only if you trigger the requirements before you accept the loan. The most common discount like this is a discount for signing up for autopay. If you sign up for autopay after you accept the loan, you don’t get the discount. 
• Loan use restrictions: Most personal loans put no restrictions on how you can use the funds. However, some lenders do. Common restrictions include business use or higher education tuition.

Mistake: Not Shopping Around

Too many people think that their credit score alone dictates what kind of loan that they can get. They think all lenders would give them the same offer. This is simply not the case. Every lender has their own algorithm for deciding who to approve, how much to offer, and at what rate. In fact, every lender thinks that their algorithm is part of their secret sauce. That’s why one lender will deny you only to have another lender give you a great offer. No lender just looks at credit score. They will look at your income, debt-to-income ratio, payment history, and a myriad of other information. The only way you can be sure you’re getting the best deal that you can possibly get is to shop around. 

At The Yukon Project, we’ve tried to make shopping around easy. If you visit our marketplace page, you can filter lenders by loan purpose, amount needed, and your credit score. You can apply to any one of the featured lenders. Behind the scenes, we will check your rate with up to 40 other lenders. Our partners use a soft credit check, so applying won’t hurt your credit score. We will show you all of your approved offers so you can be sure you’re getting the best deal you can in your situation.

Mistake: Thinking only of the Monthly Payment

If you are looking to borrow money, the natural tendency is to see whether you can handle the loan’s monthly payment. That makes sense. If you know you are going to struggle to make your monthly payment, you can predict that you are likely to experience late payments, late fees, and potential default. It’s a great exercise to evaluate your budget so you can be sure that the loan payment can fit into it. 

You should look at the affordability of the loan another way, though. A loan can seem more affordable by lengthening out the term. Moving the term length from 3 years to 5 years can decrease your monthly payment, but can significantly increase the total amount of interest you pay over time. Consider a $10,000 loan with an 18% interest rate. Moving the term from 3 years to 5 years saves you $108 per month on your monthly payment. That sounds great, but over the course of the loan you will end up paying $2,221 more in interest. In effect, you are paying 86 cents for every dollar you decrease your monthly payment. That’s a lot of extra money out of your pocket in the long run. 

The best rule of thumb for personal loans is that you should select the shortest term length you can afford. 

Extra pro tip: In the first few months after you take the loan, tighten your belt as much as you can so you can make extra principal-only payments. Every dollar extra you pay in the first six months can save you 2-4 times as much on interest in the long term. 

Mistake: Not Reading Lender Reviews

If you’ve never heard of a lender before you apply with them, you might already understand the necessity of reading reviews about them. But, did you know that there is great value to reading reviews for a company you’ve heard of. If the company is a well-trusted brand, you aren’t reading the reviews to see if they are legit. Instead, you are reading the reviews so you can tease out what to expect. Find the reviews written by customers who have completed the process with the lender so you can see what the experience was like after the initial honeymoon period was over. Skim down the 1-star reviews. These reviews aren’t likely to be representative of what you can expect, but dissatisfied customers have a way of telling you things about the company’s policies. By reading between the lines, you can understand a lot about what it would be like to do business with them, especially when things don’t go as planned. 

You can find reviews of companies on websites like Trust Pilot. Another great trick is to search for company or product reviews mentioned on Reddit. You can get some detailed experiences that way. 

On The Yukon Project, we have also done extensive reviews of national lenders. We scour through public information, look at customer comments, and use our experience in the lending industry to make sense of their policies. You can find our lender reviews on our website or on our YouTube channel. 

Conclusion

Avoiding these mistakes can help you secure a personal loan on favorable terms and prevent unnecessary financial stress. What do you think? Did we miss any common mistakes that you think we should have included? Leave a comment below. We are trying to build a community of people who can share their experiences so we can all be better informed when we are making decisions about our personal finances. If you found this information helpful, please like this video and subscribe to our channel. Your support really helps us out and we appreciate it.

See if you can get approved for a personal loan.