5 mistakes to avoid when taking out a personal loan
Posted July 2017 by Melissa Abraham-Smith
Mistakes. Big or small, you've probably made a few. In fact, I'm sure we all have! But while they may help you grow, learn, or improve, financial mistakes almost always end up costing you money. That's a costly way to learn a lesson.
From how you pay off your debts through to risky shares or investments, the financial world is littered with mistakes just waiting to happen. Even the seemingly simple act of applying for a loan or personal finance can be full of hurdles that could see you trip, fall, and lose more than a little spare change in the process.
Worried? Don't be! Today we're taking a look at the 5 most common mistakes you could make when taking out a personal loan, and giving you some go-to tips and tricks that will help you avoid them.
So if you’re thinking of applying for a personal loan, spending a little time learning from others' mistakes could save you from spending a whole lot of money in the long run.
Up first, it’s the all-important research...
1. You don’t do your homework
No one likes homework. Didn't you escape those long days and late nights when you got older and left school behind? When it comes to finding a great loan, a little homework can actually go a long way to saving you money.
There's an awful lot of choice out there, so taking the first loan that comes your way is the first mistake you need to avoid. It's hardly ever a good idea! Instead, 'don your investigator cap, go digging, and do some research. You'll quickly turn this overwhelming amount of choice back in your favour.
When you're choosing a lender, be prepared to shop around, consider the terms & conditions, repayment options, and even rates and fees. These can all vary wildly between the various New Zealand financial institutions, so take your time to compare them properly.
If this all sounds too difficult, there are ways you can make it easier. You don't have to put in the literal leg work of wandering between every bank, credit union, or financial institution in your area. Nowadays, you can simply jump online and use sites like finance.co.nz to compare your options, or turn to an independant third-party like Canstar for their expert analysis and recommendations.
Sure, they might say 'time is money', but spending a little of the former could save you a whole lot of the latter in the long run.
2. You settle for a high-interest rate
Competitive fees, terms & conditions, and other extras are all well and good, but no matter how nice they sound, you should never settle for a high-interest rate. There's just no need! And yet it can be all too easy to lose sight of the rate you're actually going to end up paying.
When looking for a loan, consider what you'll be using it for. Maybe you'll be putting it towards consolidating your personal debts? Financing a new or used car? Throwing the perfect wedding? Once you know what you'll be spending it on, you can track down a loan that fits the bill and still offers a great rate.
If you’re comfortable securing your loan with a personal asset, then maybe secured finance is your best bet. If that all sounds a bit risky, there are still some highly competitive unsecured loan rates available to you. All you need to remember is that there's always a better rate just around the corner. You just need to be willing to look for it!
3. You ignore your credit score
It’s true! Your credit score can have an impact on your loan application. At best this will affect your chances of achieving a low finance rate, and at worst could see your loan application being rejected outright.
Some financial institutions do offer finance for people with bad credit, but it’s still a good idea to check your credit score first. You can do this quickly and easily online, and get the information you need to take action.
If your credit score is good? Then you’ve got nothing to worry about. Simply track down the best provider, submit your online loan application, and then sit back and relax knowing you’ll soon be freed up financially to embrace that next step in your life.
If you find that your credit score is poor? Don’t worry. There are a number of ways you can improve your credit score before applying to a lender. By taking these steps you'll ensure you’re doing everything you can to land a low rate and maximise your approval chances.
4. You forget to make repayments on time
The loan process doesn’t end once you've been given the tick of approval. At some point, you’re going to need to pay the money back. This might sound simple, but you’ll be surprised at just how easy it is to forget.
This mistake is especially common if this is your first time applying to a lender! While a seemingly harmless mistake, missed payments are often recorded in your credit history, which could adversely affect your credit score and your chances of landing another loan in the future.
If you know how to manage utility bills or credit card repayments, then chances are you'll be fine. Simply treat your personal loan in the same way. Mark payment dates in your calendar, throw a reminder on your phone, or better yet, set up an automatic transfer via online banking so that the payments take care of themselves. It's that simple!
5. You don’t consider your budget
What are you planning on using this money for? Paying off medical bills? Maybe repaying those nagging debts? A loan may offer you exciting possibilities or help you out of a rough financial situation, but it also leaves you with outstanding debt and interest to repay.
It can be all too easy to get caught up in the loan pre-approval process, and find that you haven't asked - or answered - the most important question of all: will you be able to repay it?
Borrowing more money than you can afford can quickly see your expenses spiralling out of control, which is the last thing you want. Instead, check your budget, add the repayments, and run the numbers. If the application is successful, will you be struggling to keep your head above water? Or will you be able to manage it easily?
Ideally, any personal loan repayments shouldn’t come to more than 15-25% of your income. If it’s more than that, it might be time to consider other ways you can get the money together. Perhaps you could open a savings account or find ways to save a little extra cash.
“Mistakes were made” doesn’t have to be your loan's story
We all make mistakes. They’re a part of everyday life. But when it comes to money, you don’t have to make mistakes to learn some good lessons. Take it from us. By doing your research, checking your credit score, and making sure you’ve budgeted for the repayments, you’ll be able to make the personal loan application process pain-free and get on with living your best financial life.