Latest posts by George Paunov (see all)
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10 tips for taking out a loan online
Life is unpredictable, as the saying goes. Unexpected events can turn your financial life upside down. You may end up being in a position where you urgently need cash. In such situations, a short-term loan online could be perhaps the only way to deal with many unexpected financial circumstances. Let’s look at some tips that will help you make better choices when you need to take out an online loan.
1. Look around
As you explore your options for a loan online, the first recommended step is to research and explore. Shop around and compare the offerings, features, and APRs of each company. APR stands for annual percentage rate. It reflects the actual cost of the loan you are about to borrow by taking into account the interest rate, any connected charges, and the payment schedule. The term of the loan and interest rate in particular affect the monthly installment that you will be paying. Simple looking at the interest rates is not the best way to evaluate a loan. You must understand the full cost over the life of the loan.
2. Read the fine print
Before you sign on any document, make sure you fully understand all the terms and conditions. Sometimes, it may be better to ask for a full disclosure of all the loan’s terms and conditions in the initial exploration phase itself. After all, it may be better to read the fine print first before even going further. Going through this exercise is a must for every company that you consider because each lender will have their own terms and conditions.
It is also critical to understand what the monthly repayment details are and whether they work for you. Watch out for any late payment fees. Lenders often insert a prepayment fee clause as well. They impose a penalty for paying off the loan early because their steady stream of income from interest payments gets terminated before the term of the loan.
3. Be careful with credit card consolidation
Taking out a loan to pay off credit card debts for more than one card and consolidating the payments is one of the most popular uses of online loans.
If that’s your motive for taking out a loan, make sure that you don’t ruin your original intention by racking up fresh credit card debts once you pay off the old debts and have access to fresh credit.
4. Make sure your credit score is at a healthy level
Credit scores are very important because lenders decide interest rates based on your score. Regardless of the market interest rates, you could easily end up paying a substantially higher interest rate if you have a poor credit score.
For example, the market rate could be around 7 to 8 percent. So, if you have a decent credit score, then you could be paying around the 8 percent mark. But, if you have a bad credit score, then you might end up paying a staggering 15 percent or even 20 percent! That is why, you must follow best practices and try to keep your score as high as possible.
5. Beware of origination fees
While some lenders seem to offer lower interest rates, you may find that they also tack on an origination fee which effectively increases your interest rate. That means the best online loan for you could be from a lender who offers a higher rate but doesn’t add on any origination fee.
6. Don’t bite off more than you can chew
Before you apply for a short- term loan online, think through your financial situation and how much you can comfortably take on. Some online loan companies will look to give you more than you can handle. This means you could end up borrowing more than you can actually afford and fall into a debt trap.
7. Be careful with automatic withdrawals
Some online loan companies offer borrowers incentives to provide access to their bank accounts for automatic withdrawals of their monthly repayments. In fact, they could set up the online loan terms as such and you would have to opt out of the arrangement. For example, you may find that you’ve to pay a fee if you prefer to pay by check. If you provide access to your bank account, you may find yourself out of money when you need it.
8. Know the risks of secured loans
Secured loans are cheaper than unsecured loans, but you take the risk of losing your home if you don’t keep up repayments. Secured loans are only offered to homeowners with equity in their property, meaning that the lender can effectively take charge of your property should you can’t repay your secured loan. So don’t sign up for a secured loan unless you’re absolutely sure that you’ll be able to meet your repayments as secured loans are basically more risky for you and less risky for the lenders.
9. Repayment difficulties
Find out about your options in case you run into difficulties with your repayments. Is there any way to modify the terms of the loan? Is the lender only open to arbitration if any differences arise or can you go through the court system?
10. Fixed or variable rate?
Should you go for a fixed or variable rate on your short-term online loan? Usually, you’ll start off with a lower rate on a variable rate loan and also be taking on interest rate risk. As interest rates rise, your variable rate will also rise, meaning that your monthly payments will be higher.
However, with a fixed rate loan, your repayments will remain the same throughout the term of the loan regardless of any interest rate movements.