Understanding personal loans and avoiding bad deals
In theory, personal loans are pretty simple and straightforward, but there are things that can surprise you and put you in a bad spot. It’s important to understand how personal loans work but also what kind of dangers they come with. This will help you avoid those dangers and only get into deals that you can be sure are safe and won’t make you regret them later on. With that said, let’s start off by taking a look at what a personal loan implies exactly.
The basics of a personal loan
While there might be some differences in the details between different lenders, a personal loan will generally consist of a fixed term and a fixed interest rate. This means that you have a precise due date, and you have until that date to pay back the amount of money that you have borrowed. Having a fixed interest rate means that you know from the beginning how much money you will need to pay in top of repaying the loan, and that amount won’t change as time goes by.
Staying away from the webs of bad deals
Personal loans can be very tricky if the lender desires them to be so. There are plenty of dangers to watch out for and navigating this web of potential bad deals can be really hard, especially for someone that isn’t a loan regular. Here are the most important things to watch out for.
Origination fee
An origination fee is something you will encounter with most loans. This type of fee is usually taken from your loan upfront, which means that you will not get the exact amount of money you asked for. In order to not get completely screwed by the origination fee, make sure to ask for just enough extra money to cover the fee. This way the fee will be deducted and you will end up with the amount you wanted in the first place.
Insurance
Insurance is generally not a bad thing but it usually is if it comes paired with a loan. When giving you a loan, the lender will most likely try to make you leave the building with an insurance deal as well. Beware tactics that might try to bring your family or close ones into the mix, with a sale pitch like “protect your family if something happens to you”. The insurance deals they propose at the end of a loan deal are usually really bad and you should avoid them. Just get the loan and run!
Pre-computed interest
This type of interest implies that the lender calculates how much interest you would owe them as it accumulates over time, and adds that to your balance upfront. This might sound tempting for some, since you know from the very start exactly how much money you will have to come up with to fully pay back the loan. However, the possibility of you fully paying back the loan earlier is huge. They reassure customers with a re-calculation of interest but in the end you still end up paying more than you should on interest, so if your lender tries to give you a pre-computed interest, you should pass.
