These three mistakes could cost you big time, and they’re easy to avoid
When you’re ready to apply for a personal loan or business loan, the decisions you make matter. Which lender you apply to, the type of loan you take out and how much you decide to borrow can impact your costs for years.
In fact, according to a 2024 report by the Consumer Financial Protection Bureau, certain loan fees can increase costs by 30% or more above the original price.
Here are three common mistakes to avoid (and tips to consider) that can save you money over the life of your loan.
1. Borrowing more than you need
Step one when shopping for a loan is figuring out exactly how much money you need to borrow. This number not only helps you focus your search but also creates a limit for the minimum you need to accomplish your goals.
If you’re approved for more than you actually need, it can be tempting to borrow the full amount. But remember, borrowing more means paying more. For example, if you borrow $25,000 more than you need at an 8% interest rate on a 5-year loan, you could end up paying an extra $5,000 in interest.
The more you borrow, the bigger your monthly payments and the higher the loan’s total cost. Sticking to exactly what you need and having a clear plan to pay it back will help you stay within budget and avoid extra costs.
2. Ignoring loan fees and terms
When shopping for a loan, many borrowers focus solely on the interest rate — but that’s just one piece of the puzzle. While a low interest rate is important, personal or business loan fees and other costs can add up quickly.
Fees like origination fees, prepayment penalties, late payment charges and other common loan fees can significantly increase the loan’s overall cost. A seemingly great interest rate might not be such a great deal if it’s paired with high fees.
To get the full picture, compare annual percentage rates (APRs) instead of interest rates alone, which factor in both the interest rate and most fees. This comparison will give you a clearer idea of what you’ll actually pay over time.
Always read the fine print of your loan offer, ensuring all fees and terms are accounted for before signing your loan contract.
3. Choosing the wrong lender
Many borrowers make the mistake of applying to the first lender they find or accepting the first loan offer they receive. But not all lenders are created equal. Choosing the wrong lender can cost you, whether in higher loan costs, poor customer service or both.
Whether you’re comparing business loans or personal loans, the most important thing you can do is shop around and consider multiple lenders, paying close attention to rates, terms and customer experience. Reading real reviews on trusted sites like the Better Business Bureau (BBB) and Trustpilot can give you insight into how lenders treat their borrowers. Taking the time to compare several lenders can save you money and headaches down the road.
Wrap up
Avoiding these common mistakes can save you thousands over the life of your loan. By borrowing only what you need, understanding your loan fees and choosing the right lender, you can set yourself up for more manageable payments and a better loan experience. Take the time to compare your options, read the fine print and plan ahead.
