A loan can help you meet a variety of financial goals. A loan might come in handy if you’d like to own a house, drive a new car, or cover an unexpected expense. You may also use a loan to consolidate high-interest debt.
While a loan is a valuable financial product, borrowers may find themselves in a trap that leads to stress and worsens their financial condition. By being mindful of what the different traps are, you can avoid them. Here’s a brief list of several surprises people find when they take out a loan that isn’t suitable for their situation.
1. Failing to check your credit report before applying
Most lenders will pull your credit report when you apply for a loan. By checking your credit report ahead of time, you can understand what types of loan offers you’re more likely to get, or you may decide you want to improve your credit and then apply when you’re in a better place credit-wise.
You’re more likely to get approved if you have good or excellent credit. But if you have fair or bad credit, there’s a chance your application might get denied. As a second option, it can be helpful to learn more about what a secure loan is if you’re still in need of a loan.
Remember this rule of thumb: a better credit score can lead to a lower interest rate, translating into hundreds or even thousands of dollars in savings over the life of a secured loan like a mortgage or even a new car loan.
2. Being Dishonest on your loan application
As a prospective borrower, you must complete the loan application honestly. Applications are declined if the lender determines you lied about your income or employment situation to increase your chances of approval with an attractive rate.
You may also face a civil lawsuit or even criminal charges depending on the severity of the lie and when the deception is discovered. In addition, never use someone else’s information on your application. Doing so is a serious crime known as identity theft.
3. Failing to read the fine print
It’s all too easy to skip over the fine print when a loan agreement is presented to you. Failing to read the agreement, which is a binding legal contract, can lead to unwanted surprises like charges you didn’t expect. Be sure to read the document thoroughly and carefully. Ask the lender for clarity if you find a part that doesn’t make sense. Don’t sign on the dotted line and commit to a loan until you’ve read it all and understand it.
4. Applying for too much credit
It may be tempting to apply for a $50,000 loan when you need $5,000 to pay for a car repair, for example. Since overborrowing can lead to a cycle of debt and negatively impact your credit, only borrow the amount necessary to cover your expenses.
You can always apply for a different loan at a later time. If you want cash on hand for emergencies, you might want to consider applying for a line of credit, allowing you to withdraw funds as needed and only pay interest on what you borrow.
The Bottom Line
If you familiarize yourself with these common loan traps and try to avoid them, a loan will help your financial condition rather than hurt it. A loan is a powerful financial tool that may come in handy in various situations.
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