Are you thinking about taking out an installment loan?
Installment loans are a great tool to help you out in a tough situation, but it is important to make sure you do it the right way. There are a lot of things to think about, but taking out loans doesn’t have to be difficult or stressful.
We are here to help. Read on for 7 installment loan mistakes to avoid so you can manage your loans better.
1. Not Checking Your Credit
Before you make any major financial decisions, you should check your credit rating.
It is always best practice to check your credit rating a few months before you take out a loan. There are two important reasons for doing this: Checking the accuracy of the data, and seeing what you can do to improve your score.
Although credit scores are very thorough, mistakes do happen and it can take a number of months to get them corrected. Credit agencies are contacted 8 million times a year to dispute the information, so it isn’t unlikely that you could be impacted. Checking in advance gives you all the time you need to check the accuracy and fix any incorrect information.
You should also look at the score and see what is impacting in and how you can improve it. Every single point matters, so a few tweaks to bring it up slightly will pay dividends when it comes to taking out credit. Extending the credit line on your credit cards can bring your balance to limit ratios down, and if you have any late payments, consider delaying your loan applications. 6 months of clean repayments can substantially increase your score.
Failing to check your credit before a loan application could result in increased interest rates, or even your application being rejected outright. Always check your credit rating before taking out a loan.
2. Not Looking at Your Options
There are a lot of lenders out there, with a wide variety of terms and requirements. This is why it is important to look around and know your options. It’s expected, so making a few simultaneous queries won’t have an effect on your credit score.
Get some quotes so you can compare to find the best terms and rates. It is important to check those terms and make sure they suit you.
Check out reviews on the lenders and get a feel for what it would be like to deal with them. A good lender might be worth the extra cost than having to deal with a bad one.
Small print is there for a reason, so read it. We know it’s boring but it’s important to understand what you are agreeing to. If you are looking to get a loan from a major, reputable bank, have the financial consultant walk you through it.
Don’t be afraid to ask questions and question the terms. It’s most important you understand. While no one likes to read the small print it could save you trouble down the line.
3. Getting Larger Loan than You Need
A large possible loan amount can look like a good idea, but you might regret it later. It isn’t uncommon to get approval for a loan sum larger than you need. Most of the time it’s an amount you can’t afford to repay and you could be in trouble.
Lenders only get a small glimpse of your financial status, so the vetting process isn’t perfect. They want you to repay, so it isn’t in their interest to grant a sum you can’t repay. But it does happen.
They won’t have access to all your spending habits and information. So if you have cash expenditures, your credit report won’t detail them. This is where budgeting will come down to you.
A good idea is to prepare a budget detailing all your expenditures including cash ones. Plan out bills and your current standard of living to see what your remaining disposable income is. Then factor in your expected loan repayment amounts.
Don’t leave yourself struggling to make repayments. You must pay your fixed outgoings and shouldn’t compromise your current standard of living.
4. Thinking Only in Monthly Repayments
When you are looking at loans, it is easy to only pay attention only to the monthly repayment figures and ignore everything else. But in reality, there is a lot more to a loan than just this figure. Even loans with low interest can end up being costly if you fail to take into account any additional fees and charges. Here are some other terms you need to check for:
The size of your repayments are not only based on the value of your loan and your interest rate. The length of your repayment plan will also have an impact. Smaller repayment may mean that you will be paying off your loan for a very long time, and therefore paying for more interest than over a shorter term.
This fee is charged upfront to pay for the lender funding your loan. The value differs between lenders, but it often percentage-based. This means it will be larger if you are receiving a larger loan.
No-one plans to pay a loan payment late, but it is important that you know what the costs of doing so will be.
When you take out a loan, you will often want to pay it off as quickly as possible to avoid paying extra interest. But if you overpay your loan and pay it off faster than originally planned some lenders will charge you a prepayment penalty fee. You should always check to see whether a lender charges this fee, and how much it will be.
5. Ignoring the Full Interest Rate
While you want to make sure you can manage the interest on loan repayments, it isn’t the only thing to look at. How your lender calculates the compound interest will also have a role in the total amount payable. You want to check whether it’s calculated daily, monthly, bi-yearly or yearly.
Compound interest is the interest that is added to the previous interest you’re charged. It is the norm that lenders will tell you the total sum of interest payable on the life of the loan. You want to pay attention to this as you review your quotes.
Here is an example: You take out a loan for $10,000 on a 5-year term and the interest rate is 8%. Here are the actual repayment figures.
- Daily: $14,917.59
- Monthly: $14,898.46
- Bi-yearly: $14,802.44
- Yearly: $14,693.28
As you can see, the more often interest is compounding, the higher the amount of interest accrued. This pushes up the repayment cost of the loan. You have to be sure that this full amount is within your means of repayment.
6. Taking Out a Loan You Don’t Need
We could all do with a bit more money in our pocket, but it is important to remember than a loan isn’t ‘free money’, no matter how small the repayments are.
Before you take out a loan, have a good think about whether you actually need it. Think about what you will actually gain by taking out a loan, compared to the risks of adding an additional monthly expense to your budget.
Expensive necessities like a home or automobile almost always require you to take out a loan to finance them, but taking out a loan for something you don’t need is always a bad idea. Luxury items can be saved for, and will likely be more enjoyable if you don’t have to worry about making repayments.
7. Collecting Too Much Debt
If you take out too many loans, even small repayments will add up and leave you in a bad financial situation.
It is easy to take out a few credit cards and slowly fill them up, only paying off the required balance each month. If you let this go on, you may find yourself paying huge amounts of interest on multiple balances.
Installment loans can be a useful tool to pay off high-interest credit card debt, or other high-interest charges. But it is important that you deal with the root cause of accruing the debt in the first place. Otherwise, you’ll quickly fill up your credit cards again. Try to pay off credits cards and reduce your reliance on them.
Avoid Major Installment Loan Mistakes
So there you have it. Installment loans can be a great tool for getting you out of a bind or consolidating your high-interest loans. By making sure you avoid these mistakes you can avoid a lot of difficulty down the line.
As long as you avoid these installment loan mistakes, you can be sure you are making a sensible decision. Your potential lenders will have the correct information to asses your application against, and you won’t be caught out by any hidden fees.
If you found these tips useful, the make sure to check out our learning center. We have articles to help you understand and better manage your financial situation, and t get the most out of your money.