Personal loans are a great way to access money quickly during emergencies, fund major projects, build your credit score, or consolidate debt. However, like with any financial tool, using them responsibly is important. These loans come with their own set of dos and don’ts that borrowers should be aware of. Read on to learn how to make the most of personal loans while avoiding potential pitfalls.

Do: Compare Rates and Terms

Exploring different lenders and their interest rates can be crucial when considering a personal loan. Interest rates can vary significantly from one institution to another, and even small differences in rates can impact the overall cost of your loan. It’s also a good idea to compare origination fees, prepayment fees, and loan terms. APRs are useful in comparing the total cost of loans when the repayment period is about the same. Loan calculators are also a good tool for comparing different loans.

Do: Review Your Loan Agreement Carefully

Your loan agreement includes essential information such as the loan amount, interest rates, penalty clauses, and payment due dates. When applying for a personal loan online, you may be tempted to check the terms and conditions box without reading the information closely. However, reading your loan agreement can help you learn the ins and outs so that you won’t be caught off guard by due dates or additional fees. Reach out to your lender and ask for clarity on any terms you don’t fully understand.

Do: Make Payments on Time

Making timely payments can help you in two ways: it allows you to avoid late fees and helps build a positive payment history that may improve your credit score. Stay on top of your monthly payments by setting reminders so you never miss a due date. You could also consider setting up automatic payments for your personal loan so that you don’t have to think about paying your bill on time each month.

Don’t: Borrow More Than You Need

One of the most common mistakes borrowers make is taking out a larger loan than necessary. This not only increases your overall debt, but also results in paying more in interest over the loan’s term. Carefully assess your financial requirements and only borrow an amount that’s essential to meet your needs.

Don’t: Ignore Your Credit Score

Your credit score plays a pivotal role in determining the terms of your personal loan, including the interest rate. Check your credit score before applying to get a better sense of what you might qualify for. This can help avoid unfavorable loan offers or even rejection. Checking your credit score in advance may help you understand what types of loans may be available to you. Additionally, you may find errors in your report that you can dispute and resolve, increasing your credit score before you apply for a loan. Be proactive about boosting your credit score if there’s room for improvement, as this can open doors to better loan options.

Don’t: Agree to Payments You Can’t Afford

The size of your personal loan payment depends on the loan terms you choose or qualify for. Generally, a longer loan term means lower monthly (or biweekly) payments, while shorter repayment terms may mean higher installments. Work with your lender to arrive at a payment size that fits comfortably into your budget. Don’t hesitate to request a longer term if you need to.

The Bottom Line

Personal loans are valuable financial tools when used wisely. By adhering to these dos and avoiding the don’ts, borrowers can make informed decisions, save money, and use personal loans to their advantage while safeguarding their financial well-being.