Getting a personal loan online has grown into a multi-billion-dollar industry, with lenders ranging from individuals in peer-to-peer programs to big banks. Although countless Americans have been helped by the ability to borrow money without leaving home, others have hurt themselves by being ill prepared for the process.
"Because the loans are being evaluated remotely, the chances of making a mistake are increased," warns Todd Nelson, Business Development Officer of LightStream.com, which offers personal loans from $5,000 to $100,000. In an exclusive MoneyTips interview, Nelson reveals the 5 worst mistakes you can make when borrowing money online.
- Ignoring inaccuracies on a credit report
Credit bureaus constantly receive information about your credit use and history, contributing to a profile that lenders consider to evaluate creditworthiness. Says Nelson, "Your credit report indicates important items like, how much revolving debt are you carrying? Are your auto payments up to date? Any past bankruptcies? Is your mortgage being paid on time? The answers to these and other data points impact whether you'll be approved for a loan and how much you'll be charged in interest rates." Typically, the stronger and deeper your history of good credit, the less you'll be charged to borrow funds.
It is important that you look at your credit report to make sure that your record is accurate before you apply. Work with the bureaus to fix any mistakes. A few small errors can mean the difference between approval and denial, or you may have to pay a higher interest rate than you should to fund the loan.
- Not shopping around
Counsels Nelson, whose firm can fund loans on the same day of application, "The initial step many consumers take in looking for an online loan is to visit a search engine and then click on the first link that pops up. It's important to research several options in order to secure the best deal. Pay attention to the details of the offer. Rates and Fees are separate items that contribute to the Annual Percentage Rate (APR) in a loan. If you choose us or any other lender, make sure that you understand both Rates and Fees." That leads directly to:
- Not figuring the optimum combination of rates and terms
The smart financing strategy is to lock in the lowest APR over the shortest payback period. Use an online calculator to help figure out the right balance of affordable monthly payments over time. Paying back your loan quickly may demand higher monthly payments, but your overall financing costs can be significantly lower in the long run. Also, make sure your lender does not charge pre-payment penalties. That brings us straight to:
- Skipping the fine print
Some companies blatantly boast "No Hidden Fees" in big headlines. When you read their disclosures, however, they've actually published their fees in small print somewhere on their site. Explains Nelson, "Technically, those fees aren't hidden—you just need to search carefully to find them. As a result, you may wind up paying significant costs for application processing, closing points or account maintenance. You may also wind up with additional fees down the road, with late fees for a missed payment or a pre-payment fee if you decide to pay off your loan early." Nelson is proud of the fact that LightStream does not charge fees or prepayment penalties.
- Getting out of debt...and getting into more
Debt consolidation financing is a popular solution offered by many online lenders. It makes a lot of sense to refinance high rate credit card balances by paying them off with a fixed-rate, lower-APR loan. Nevertheless, Nelson warns that, "Many consumers make the mistake of running up their credit cards again after they've been paid off." His advice? "Get out of debt, and cut up those cards."
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