Credit cards should not be a default when you are looking to borrow money. Personal loans are not only simpler, they offer better rates. Even better, you can buy a personal loan without damaging your credit score. For example, you can buy LendingTree Personal Loan Shopping Tool to get prequalification in less than five minutes.
When you approve a personal loan and accept the terms, the money can be sent directly to your bank account, or you can get the money with a check.
The terms of the loan are usually quite simple:
- There is a fixed term.
- There is a fixed interest rate.
Personal loans are not without their faults
Even personal fiduciary loans can have their own tricks. While we like it more than borrowing with credit cards, you should be careful with:
- Insurance sold with the loan.
- Pre-calculated interest
- The origination fee
- Prepaid sanctions
Oddly enough, these tricks may not be buried in small print. In fact, your insurance salesman might mention some to convince you that they are necessary for your protection. We want you to understand what these four terms mean so you can decide if you need them and, if you do, how to find options that will not cost you hundreds or thousands of additional fees.
How to avoid tricks
There are a number of lenders that do not combine insurance, do not use interest pre-calculation contracts, do not charge an origination fee and do not have early payment penalties.
We recommend that you shop online to find lenders without those tricks and traps. A good place to start the search is with LendingTree, our parent company. With one, the short online LendingTree form will perform a smooth credit extraction (with no impact on your score) and combine it with multiple loan offers. Interest rates can be lower than 6% for people with excellent credit. And because dozens of lenders participate in the LendingTree program, you can also find lenders willing to accept borrowers with less than perfect credit.
Now we will explain, in more detail, the tricks you can find hidden in some personal loan contracts.
Trick one: sure
We all want to protect our families from the unexpected and insurance is an excellent way to do it. In a similar way to how we recommend planning your debt in advance (and looking for the best offer), you should do the same with insurance. However, many personal loan providers will try to add an insurance selling argument at the end of a loan closing. The two most common types of insurance are life insurance and unemployment insurance.
For life insurance, a typical sales pitch would be this: “For the single cost of one can of soda per day, you can make sure that children never have to worry about this debt if they die.” Be careful with these sales of high tactical pressure. The value of these additional policies is almost always scandalously bad.
To protect your family, you should think of a good term life insurance policy that covers not only your personal loan, but all your needs. Do this search separately from the loan transaction.
Unemployment insurance could be a bit more convincing (because, unlike term life insurance, it is difficult to buy a separate policy that would make loan payments on your behalf if you lose your job). I have seen people benefit from these policies. But you need to do the calculations. How much does it cost per month? While you are not at high risk of losing your job in the next 6-12 months, it is almost always better to save money (instead of paying the premium). There are also a lot of limitations on the amount of the loan payment that can be made (and the time that will be paid). You should ask them the following questions:
- How much does this cost a month?
- What are the requirements to be able to claim?
- How much would you pay and for how long?
- When you ask these questions, you are likely to see that the policy offered is of little value, and it is better to simply save the money yourself.
Trick two: Pre-calculation of interest
This is a bit confusing. Therefore, we will make it simple. The interest prior to the calculation is a bad business. Avoid it And do not be afraid to ask if they are doing it to you.
It is a complex way to calculate interest, and the complete reason why it exists is to make sure you pay more interest in the first months / years of your loan. Therefore, if you cancel your loan in advance, you end up paying a higher interest rate than the quoted rate.
If you take out a loan with a term of three years and it takes three full years to repay the loan, then there is no difference between a normal loan and a pre-computed loan. But, if you cancel the loan early, you will pay more interest. Advertising is particularly misleading if there is a promise of “no penalty for early payment” because the interest is charged according to the “prequalification” method.
How does pre-calculated interest work?
In a normal loan, the interest will accrue every day at the agreed rate. If you wish to cancel your balance, you only have to return the balance of the loan and the interest that has accumulated since your last payment. Simple.
In a pre-computation loan, the total amount of interest you would pay during the entire term of the loan is calculated and added to the opening balance. Then, if you borrow $ 100, and return $ 50 of interest during the loan, then your balance becomes $ 150. If you cancel your balance early, an interest refund is calculated. The interest refund is calculated using the Rule of 78. This is another complicated way to make sure that you are charged more interest in advance. If you want to know how the calculation works, visit this site.
In a few words: do not be afraid to ask if they calculate the interest using the “pre-calculation” method. If they do, do not be afraid to walk away. Especially if you think you’re going to pay off the loan early.
Trick three: origination fee
Most personal loans charge an origination fee, so there is no way to avoid it. To see if you are getting a good deal, be sure to compare the annual rate of a loan, not the interest rate. An APR includes the origination fee, and assumes that you do not pay the loan early.
There are two ways in which people stay with the rate:
He does not realize that the fee is deducted from the loan amount. If you need to borrow $ 10,000 and there is a 3% fee, be sure to borrow $ 10,309.28. The 3% rate will be deducted and you would end up with $ 10,000 of the loan funds.
You will not receive a refund if you pay in advance. In the previous example, if you paid the loan a day later, you would not be reimbursed for the fee. Then, an origination fee is like a disguised prepayment penalty.
The APR of a personal loan (including the rate and the interest rate) can be much lower than the interest rate of a credit card (and can save you a lot of money). Just make sure you understand the rate and compare the APR.
Trick four: prepay fines
There are indirect ways to collect fines for early payment (precursor interest and origin fees). And then there are direct forms: a fine for prepayment. Most lenders do not charge this, so you should be able to avoid it altogether. Just be sure to ask if there is a prepayment penalty.
Personal loans are great, if you do the research
With a personal loan, you can have a fixed interest rate, a fixed payment and a fixed term.
If you compare APR, then you will make the right decision. Do not limit yourself to choosing a personal loan and finish by taking out a pre-calculation loan, with three complementary insurance policies and a large opening rate, only to refinance the loan three months later. These are sub-prime tricks that can drastically increase costs.
If you borrow for 36 months and pay for it in 36 months, then you are in good shape.