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You can learn more about prepayment penalties on personal loans, how to avoid them, and other frequent mistakes borrowers make here.
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What does a personal loan prepayment penalty entail?
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Why impose a prepayment penalty on borrowers?
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What is the price of a prepayment penalty?
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How can you determine if there is a prepayment penalty on your personal loan?
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How may a personal loan prepayment penalty be avoided?
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What other frequent blunders should you avoid while applying for a personal loan?
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What does a personal loan prepayment penalty entail?
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While paying off a loan early is often a proud event, some lenders may impose a prepayment penalty. Some lenders charge this fee when a borrower opts to repay a personal loan early.
Prepayment penalties are not always associated with personal loans; they are typically associated with company loans, mortgages, and auto loans. However, it never hurts to get in touch with your lender and inquire about any fees associated with early loan repayment.
Before accepting a loan with a prepayment penalty, borrowers are advised by the Consumer Financial Protection Bureau (CFPB) to read the fine print. It's crucial to read your loan agreement attentively and comprehend the terms because any such penalty will be revealed in the loan paperwork.
Why impose a prepayment penalty on borrowers?
The majority of the money that lenders receive comes from the interest they add to your loan. The lender loses money on the loan when a borrower pays it off earlier than expected.
Specific lenders may impose a prepayment penalty to compensate for the money lost from interest if you pay off your debt ahead of schedule. Borrowers who want to pay off their personal loans early so the lender can get the total amount of interest due may run into prepayment penalties.
What is the price of a prepayment penalty?
The lender will determine how much a prepayment penalty will cost. Prepayment penalties are generally assessed by a lender as follows:
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a single, one-time cost
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a specific portion of your loan
The interest charge for the remaining loan term
You should know the overall cost before deciding whether to pay off your loan early if your lender levies a prepayment penalty. By utilizing the personal loan calculator on LendingTree, you can learn more about how much a loan can cost you overall.
How can you determine if there is a prepayment penalty on your loan?
The majority of lenders are transparent about any prepayment penalties they may impose. To learn more about if they do and how much they charge in prepayment penalties, some may, however, call for a little more investigation. Before accepting a personal loan from a lender, ask them directly for further information about their personal loan conditions and costs if you can't easily obtain information about the lender's prepayment penalty. Before signing, make careful to read the small print about a loan's prepayment penalty.
How may a personal loan prepayment penalty be avoided?
Although you might try to bargain with the lender to remove the prepayment penalty from your loan, many lenders of personal loans do not impose this price, so it could be best to just find another provider.
Calculate the costs if you want to pay off your loan early. If you're close to paying off the remaining sum on your loan, it can be less expensive to keep paying on a monthly basis and forego the fee. However, you might find that paying off the loan early is advantageous because the prepayment penalty is cheaper than the total interest you'd have to pay during the loan's term.
When looking for a personal loan, browse around and compare rates from several lenders to avoid paying a prepayment penalty. This is possible on LendingTree's personal loan marketplace, which is transparent about the rates, conditions, costs, and loan amounts charged by lenders.
What other frequent blunders should you avoid while applying for a personal loan?
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not getting prequalified without first checking your credit
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not comparing available choices from different lenders
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ignoring the APR and failing to consider potential fees
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disregarding the loan duration, breaking the contract
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Using your personal loan for an unnecessary expense
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applying for too many loans at once and not taking a cosigner into account
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submitting late payments
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not making loan payments
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not taking into account potential solutions
1. Not first check your credit
Your financial situation and credit score will have a significant impact on your eligibility for a personal loan, as well as the loan terms you are offered. Before submitting an application for prequalification, you can determine which lenders will consider your loan by checking your credit.
Visit AnnualCreditReport.com to view your credit reports from the three main credit agencies. At LendingTree, you may view your credit score without having any impact on it. Additionally, you can discover more about what affects your score, how to increase savings, and other topics.
Once you have your credit reports in your possession, carefully review them. You should seek out and contest inaccuracies, such as inaccurate debt information.
2. Not receiving preapproval
Prequalification entails submitting a preliminary application to a lender to determine your likelihood of approval and, if so, the terms that will apply to your loan. Even though not all lenders offer prequalification, the prequalification process enables you to compare lenders in greater detail.
During the prequalification procedure, the majority of lenders run a soft credit check; this won't have an influence on your credit. You'll probably see the option to "check rates" when you go to a lender's website. You must include basic information on your income, housing situation, desired loan amount, and purpose when completing an application for prequalification.
Additionally, you can submit a single application to a lending marketplace like LendingTree to perhaps obtain various loan offers. You can see what terms you might be able to acquire if you prequalify with one or more lenders.
Prequalification is a wonderful way to evaluate lenders, but it doesn't ensure that you'll be approved for a personal loan when you submit a formal application.
3. Not analyzing available choices from various lenders
Loans for personal use are exactly that—personal. Each lender has their own process for analyzing your credit profile and offers various loan terms. By choosing the first loan you come across, you run the risk of missing out on a lender's lower interest rates, more accommodating loan terms, or superior customer support.
According to a March 2021 LendingTree study on personal loans, APRs on personal loans can start as low as 10.73% for borrowers with good to exceptional credit, while they can reach 65.93% or more for those with fair or weak credit.
You can be eligible for a more cheap personal loan if you have solid employment history and a low debt-to-income ratio. Check prequalification offers from at least three lenders to obtain personal loan conditions that are affordable for your financial circumstances.
Compare elements like:
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Loan amount options
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range of terms for repayment
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rates of interest
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Charges, like an origination charge
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Finding a lender who reduces your borrowing costs is ideal.
4. Neglecting to take into account the APR
If you're looking for a personal loan, the monthly payment is probably all that's on your mind as you make sure you can afford it. APR (annual percentage rate) is a more accurate indicator of your loan cost, so don't stop there. It comprises the interest rate as well as additional loan expenses, such as origination fees. The APR is the same as the interest rate if there are no costs.
A personal loan calculator can help you determine the potential costs of a personal loan throughout the course of repayment if you obtain an expected APR or range of APRs from prequalification offers.
5. Ignoring potential costs
There could be additional fees associated with personal loans, such as origination charges, prepayment fines, and late fees. Even though not all lenders have fees, you risk getting a nasty surprise if you don't check. Before agreeing to the loan, find out if there are any fees and when the lender plans to collect them.
The normal range of origination costs for personal loans is between 1% and 8% of the loan amount. Either your loan proceeds are reduced, or the principal balance is increased. For instance, a $10,000 loan with a 4% origination fee would cost you $400.
When you pay off the loan before the repayment period has ended, prepayment penalties are assessed. Depending on the loan and lender, different penalties may apply as well as different conditions that result in them.
When a payment is a past due, late fees are assessed in the form of a fixed sum or a percentage of the past due amount. After 30 days, the lender may also notify the credit bureaus of a late payment, which could affect your credit scores.
6. Not accounting for the loan term
The number of months during which you'll repay the personal loan is known as the loan term (sometimes called the payback period). Shorter-term personal loans typically have greater monthly payments but lower overall interest costs. Lower monthly payments but a higher overall cost of borrowing are associated with a longer term.
You can select the ideal loan for your needs by knowing how the length of your term affects the overall cost of borrowing.
7. Failure to read the contract
People sign documents they haven't read far too frequently. When taking on debt, be sure to read all of the fine print. Reviewing the terms and charge structure of a lender offering pricey personal loan products will help you find hidden costs. For instance, if you want to pay off your debt faster but are unaware that your lender levies a prepayment penalty, you may be paying expensive fees.
All loan terms should be made known by your lender. Ask questions if you're uncertain or have any. Additionally, it's crucial to double verify your loan application for any errors. Although honest mistakes are sometimes understandable, they can have an impact on your loan eligibility and conditions.
8. Making careless use of your personal loan
A low-cost personal loan might be more cost-effective than using a credit card to pay for a vacation or luxury buy, but that doesn't necessarily mean it's the wisest financial move. Taking on the debt of a loan to pay for an unnecessary item could end up costing you, especially if you find that you can't make the payments.
Both are suitable applications for consolidating debt or using personal loans to pay for emergencies. Debt consolidation may make it possible for you to pay off your debt more affordably, and while emergency expenses are often required, they can be prohibitively expensive.
9. Making many credit applications at once
Avoid making a large purchase on credit before applying for a personal loan or while the application procedure is ongoing. Before or during your personal loan inquiry, taking out additional credit could reduce your chances of approval. Additionally, it is not a bright idea to take out a personal loan while you are in the middle of closing on a mortgage.
Make sure you only submit one loan application at a time and wait a while before attempting another credit query for a different reason.
After receiving the loan money, monitor your spending. If you have consolidated your debt into a single loan but continue to rack up credit card debt, you risk going further underwater. The ability to repay the loan may be hampered by carrying two obligations.
10. Ignoring the need for a cosigner
There are various benefits and drawbacks for you and the cosigner of a personal loan, and not everyone needs one. On the plus side, a cosigner might aid in your loan application and help you secure a more enticing interest rate. However, the cosigner is under a lot of pressure because they will be held liable for payments if you cannot, and missing or late fees will harm both your credit and the cosigner's credit.
Before asking someone to cosign a loan, think about these advantages and disadvantages. It might be a good idea to have a cosigner available on the sidelines if your credit is terrible.
11. They are delivering late payments
While paying on time might help your credit, making late payments hurts your credit scores. Your overall cost of borrowing will go up if you have to pay a late charge if the price is past due, depending on the loan terms. Although the precise amount will vary per lender, the late fee may be assessed as a fixed monetary amount or as a percentage of your outstanding monthly payment. Some lenders don't even impose late fees.
Create a calendar alert a few days before the payment is due to prevent late fees. The lender can also allow you to set up automated withdrawals from your bank account for payments. (Some lenders will even lower your APR as compensation.)
12. Failure to return the loan
What happens if I don't repay a personal loan? You might be thinking. There is nothing good in reality.
The lender may record the account as delinquent to the credit bureaus if you start to miss payments. Your credit will be affected negatively by this. You risk defaulting if you continue to miss payments for 90 days or longer. You'll probably start getting calls at this time demanding payment. You can anticipate the lender sending the loan to a collection agency shortly after.
The lender may also go to court and ask for a judgment to garnish your salary, put a lien on your property, or take money out of your bank account if the debt is still within the statute of limitations.
13. Ignoring potential solutions
Don't fall into believing a personal loan is your best bet. For instance, if your credit is good, you might look for a credit card with a promotional APR deal.
Credit card companies frequently offer cards with a promotional 0% APR to entice new consumers. As long as the total is paid off before the offer expires, these offers, which generally last 12 to 21 months, can be a terrific option to consolidate debt or make a significant buy for less. (If you fail to do so, you risk being charged delayed interest going back to the purchase date.)
If your credit is fair or poor, a secured loan may result in cheaper borrowing fees. They may also be simpler to qualify for due to the lender's lower risk. Secured loans are backed by collateral, so if you default on the loan, the lender has the right to confiscate the collateral.
