You don’t want to end up with the wrong lender for your needs.
- There are many different lenders offering personal loans.
- Rates and terms can vary from one lender to another.
- Borrowers should be on the lookout for disadvantageous terms when shopping for a personal loan lender.
Personal loans can be a great borrowing tool because of the flexibility they offer. You can use the proceeds from your loan for almost any purpose and you can often get a lower interest rate than with other common types of consumer debt such as credit cards.
But it’s important to get the right personal loan if you’re thinking of borrowing money using this approach. And to do that, you should be on the lookout for four red flags when selecting which lender to borrow from.
1. A high interest rate
The most obvious red flag that should deter you from taking out a personal loan from a particular lender is a high interest rate.
See, the higher your rate is, the more expensive your loan will be over time. A higher rate also means you’ll have to cover more interest each month, which will make your monthly payments higher.
Rates can vary from one personal loan lender to another, and the only way to know if a particular lender is offering a prohibitively expensive loan is to comparison shop. By getting multiple quotes, you can immediately identify which lender, if any, is overcharging you for interest and you can cross that lender off your list.
2. A long payoff time
Sometimes, lenders will make monthly payments look affordable by stretching out the repayment timeline on your personal loan. Unfortunately, a long payoff time can trap you in debt for years, interfering with other financial goals. You could also end up paying a lot more interest than necessary if you stretch out your repayment timeline.
To make sure you spot this red flag, compare the payoff periods — and total borrowing costs — with different loan providers. If one loan seems cheaper due to lower monthly payments but it has simply extended your payoff time, you may want to opt for a different lender.
3. Expensive upfront fees
Some personal loan lenders charge application or origination fees, while others don’t. Paying a lot of money upfront just for the privilege of borrowing can make your loan much more expensive. You don’t want to get hit with unnecessary fees, so watch out for them when comparing loan terms.
4. Prepayment penalties
When you’re taking out a personal loan, you want the flexibility of being able to pay it back early if your finances allow you to do so. As a result, you should look carefully to see if a lender you’re considering will charge you a penalty for paying off your loan early.
Since there are many lenders that allow you to repay your loan ahead of schedule with no financial consequences, there’s usually no reason to go with one that adds this cost on if you hope to become debt free sooner.
By watching out for these four red flags, you can hopefully find a loan that’s affordable, that you’ll pay off in a reasonable time, and that’s the best loan to meet your needs.
The Ascent’s Best Personal Loans for 2022
The Ascent team vetted the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by slashing your interest rate or needing some extra money to tackle a big purchase, these best-in-class picks can help you reach your financial goals. Click here to get the full rundown on The Ascent’s top picks.