When you need money and don’t have it available in your savings account, a personal loan can seem like a good borrowing option. A personal loan allows you to borrow money for any reason. You can take out a personal loan to renovate your home, start a business, or pay off existing credit card debt.
The upside of personal loans, aside from the flexibility to use your loan proceeds as you please, is that they tend to come with competitive interest rates. In fact, you’ll generally pay a lot less interest on a personal loan than you will on a credit card. But here’s why your personal loan could end up being more expensive than anticipated.
1. Your credit score isn’t great
It’s possible to get a personal loan even if you don’t have the best credit score in town. But you should know that the lower your credit score, the higher the interest rate you’re likely to face on your loan. That’s because a lower credit score sends the message to lenders you’re a more risky borrower.
Unlike mortgages and auto loans, which are secured by specific assets (homes and vehicles, respectively), personal loans are unsecured. This means they’re not tied to an asset your lender can access should you fall behind on your loan payments. When it comes to qualifying for a personal loan and locking in an interest rate on one, your credit score carries a lot of weight.
2. You’re charged a lot of fees
You may be familiar with closing costs on a mortgage. Personal loans work similarly in that you’ll typically be charged a series of fees to put that loan into place. If those fees are high enough, they’ll cause your loan to cost more than expected. That’s why it’s important to ask about those fees upfront, before signing a loan agreement.
It’s also a good idea to shop around with different lenders before committing to a personal loan. When doing those comparisons, don’t just look at the interest rate on your loan, but also the fees you’ll pay to finalize it. That way, you can lock in the best deal.
3. You’re forced to borrow more to meet a lender’s borrowing minimum
It takes a fair amount of administrative work to put a personal loan into place. Lenders tend to set borrowing minimums to make sure that work is worth their while. But if your borrowing needs are below local lenders’ minimums, you may end up having to borrow more money just to qualify for a personal loan.
Say you need a $3,000 loan but lenders in your area generally have a $5,000 personal loan minimum. That means you may have to take out a larger, more expensive loan to get access to the money you need.
Borrowing money with a personal loan could be a quick, convenient solution for you. Just be aware of the reasons your loan might cost more, and research different borrowing options to make sure you’re getting a decent deal.