Beware of these red flags when applying for a personal loan

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Personal loans are generally an affordable way to borrow. They often have a lower rate than credit cards. And since these loans are designed to be repaid over a few years, they give you the flexibility to pay off large purchases slowly.

However, not all personal loans are created equal. Some payday loans masquerade as personal loans, for example. And some personal loans are offered by unscrupulous lenders with very unfavorable loan terms.

You want to make sure that you don’t end up with a loan that you will regret. So before taking out a personal loan, be on the lookout for these three big red flags.

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1. Your repayment schedule is very short

A short repayment term usually comes with very high payments because you only have a few weeks or even months to pay off the loan. The problem is, you may not be able to afford the payments.

Doing so could damage your credit score or force you to borrow again and find yourself trapped in a cycle of repeated borrowing. This is what helps make payday loans the most dangerous type of debt.

2. You will have to pay a high set-up fee

Many personal lenders do not charge any origination fees. Although some reputable lenders charge a nominal fee to create your loan, it will not amount to a huge percentage of the loan amount.

If you are asked to pay a large fee, especially if you are buying a small amount, you should avoid it. The fees will make your effective interest rate very high and make it very difficult to repay your loan.

3. The loan comes with heavy prepayment penalties

You will want the freedom to pay off your debt sooner if you can find the money to do so. Therefore, it is important to avoid a loan with prepayment penalties.

Most reputable lenders won’t penalize you if you want to get out of debt sooner. There is little reason to settle for a loan that punishes you for being responsible and wanting to get out of debt as soon as possible.

How to find a good personal lender

Paying attention to these red flags can help you avoid a bad lender. But how do you find a good one? The key is to get quotes from several different loan providers and compare their:

  • Interest rate
  • Loan repayment terms
  • Original fees
  • Terms and conditions (such as prepayment penalties)
  • Qualification conditions
  • Financing timeframe

Look for a lender who offers you the most reasonable rate and fees. And make sure the repayment schedule doesn’t leave you in debt for decades or force you to pay off your debt in a matter of weeks. Pay attention to the total cost of the loan as well as monthly payments and upfront fees. And make sure that you can meet the requirements of the lender for loan approval.

Ideally, you’ll evaluate the store and compare those features with at least three different loan providers – or more – to find the personal loan that’s best for your specific situation.

For more information on payday loans, see our research on personal loan statistics.

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