When it comes to obtaining funds during an emergency personal loans hands down beat out credit cards. With credit cards you are paying for a higher interest rate in most cases largely due to the fact that credit cards are not meant for planned spending. Credit cards also often have hidden charges and fees. With a personal loan there is a fixed interest rate. Personal loans also feature fixed terms, you always have a set payment per month and always have a date when you are sure the debt will be completely paid off. Also with personal loans you are planning to borrow in advance so you can shop around for a loan that fits your unique financial situation. You can shop around for the best possible rates and you can pay closer attention to what fees may come with the loan.
Personal loans however do have their downsides, lenders like to use a few tricks to maximize the amount of money they can make off the loan they provide to you. I will discuss some of the common pitfalls and tricks lenders use when it comes to personal loans. These are not always buried in fine print either, in fact your lender may even tell you upfront by try and convince you that you either need it or that is is for your own protection. Here are four tricks that lenders often use, once you learn what these terms are you can better decide for yourself if you need them or not.
Lender often try and push loan insurance on you. This loan insurance will be in one or two forms or both. The first form of loan insurance is life insurance, meaning that if you die your family is not responsible for the debt. This is usually a very bad deal, if you are that concerned about life insurance go buy a real life insurance policy as it will be good for more than excusing just one debt. The second form of insurance they try and push on you is unemployment insurance. People can and do benefit from this insurance but you will need to weigh several factors such as the cost versus the likely hood that you may lose your job.
This is an all around bad deal, to put it simply do not go for this. What it does is it is basically a very complex way of calculating interest. Your interest rates are higher at the beginning of your loan and taper down as the length of the loan progresses. If you pay of your loan early you will be paying more interest. If you take the full term of the loan to pay if off than there is no difference in your overall paid interest. This form of calculating interest basically charges you more interest up front and results in higher payments at the beginning of the loan. if your lender calculates your interest using the “pre-compute” method I would advise walking away from that loan and finding a loan elsewhere.
You cant avoid paying this fee but you may be being charged a high origination fee. You need to compare the APR of all of your loan offers along with the interest rates of the loans. APR always includes the origination fee. Understanding what fee you will be paying is crucial when you are loan shopping. This fee is deducted from your loan amount as well so be sure to factor that in when deciding how much you intend to borrow. I should also point out that you do not receive a refund of this fee if you happen to pay off the loan early.
Personal loans are better than breaking out your credit cards when it comes to major spending or expenses. That being said you should be aware of these pitfalls and shop around for you loan carefully. Compare loan offers and their APR. Whatever you do, do not jump on the first offer to come your way. Do your research and pick out the best possible loan for yourself.