Taking out a personal loan has become easier and easier, from banks to 3rd party financial service providers, to retail stores all willing to provide consumers with short-term credit on a whim. It may seem like a very simple process, apply for the loan, spend the money, then spend a designated time period paying it back.
However, many consumers aren’t always clued up on their obligations and terms and conditions surrounding personal loans and end up putting themselves under financial strain simply because they don’t understand how this financial instrument works.
1. Take your time & do your research
The majority of personal loans are done reactively and are driven by impulsive purchase behaviour, you need to purchase goods or services you can’t afford at the time or respond to an emergency situation. This causes many consumers to seek out a personal loan without considerations of the repercussions and consideration for their current financial situation.
If you rush into getting a small personal loan, you may overlook vital details that can cause you to accumulate future financial issues. Most small personal loans are dangerous but, for some, they are the only solution to current financial problems.
When it comes to taking a small personal loan, you need to make sure you understand the process and here are a few things you need to consider.
2. Small loans can be dangerous
Taking out small loans can lead to bad financial habits, like getting trapped in a cycle of taking out loans to pay back loans. You’re likely to see high-interest rates on small loans, making it difficult to break the cycle of debt.
For more on bad financial habits check out our post – Quit These 10 Bad Financial Habits To Avoid Debt
3. Rates may not be your only cost
Don’t get sold on the fact that you can get a small loan at a good rate. Make sure you read all the paperwork to see exactly what fees you will need to pay as well as interest on missing payments. Calculate all the rates and fees together to see if it’s worth taking out a personal loan.
4. Not paying back your loan can lead to greater financial disaster
If you cannot keep up with your loan fees and rates, you may get hit with big penalties, fees and interest charges. This will cause your credit scores to fall, making you a bad candidate for future credit. The lender may also go ahead with legal action against you, which can also cause a lot of pressure on your finances.
If you are considering taking out a loan to repay debt, check out our post – I need a loan to pay my debt in South Africa: The Pros & Cons
5. There are bad lenders out there
Even though you may need money quickly, don’t accept loans from any lender. Make sure you look at online reviews and, if possible, ask a few close family members or friends for help when choosing a lender.
Here are a few red flags you should look out for when it comes to lenders:
- Failure to assess your information before guaranteeing you a loan – this is a legal requirement.
- Upfront fees – are they within the prescribed limits?
- Names similar to well-known companies – make sure you are dealing with the company you intended to deal with.
- Continuously asking for and trying to access as much of your personal information as possible, especially over the phone.
- Putting pressure on you to take out a loan quickly without giving you time to access other options.
When approaching a lender make sure you do your research or approach a reputable institution like your bank or a large retail store, institutions with high liquidity tend to provide favourable rates however their requirements to qualify for a loan by being stricter than your smaller lenders.
6. Try and avoid small personal loans at all costs
It is easy to rack up debt and some lenders play to that fact and make it easier for consumers to take loans only to lock them into a cycle of debt they can’t get out of. Watch out for predatory loan practices like payday loans.
These financial practices are designed to entice consumers to overspent and only drive themselves further into a hole as they have to repay highly inflated repayments due to massive inflation on these loans.