Personal loans can be an effective financing tool for many reasons, including debt consolidation and covering unexpected expenses. However, it is important to review your credit and loan terms before taking out a personal loan.

While reputable lenders typically require good-to-excellent credit, there are several lenders that cater to those with fair or poor credit. Nevertheless, some borrowers make costly mistakes when applying for personal loans.

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1. Not Taking the Time to Research Lenders

A personal loan can be a great way to pay for unexpected expenses, or to better manage existing debt. However, it’s important to understand the risks and benefits before deciding to borrow. It’s also important to make sure that you can afford the monthly payments and other related fees. To do this, you should create a budget and determine how much the loan will cost, including the principal (the original amount borrowed) and interest. Once you’ve done this, you can choose the lender that offers the best terms.

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Different lenders have varying requirements for loan eligibility, and the type of personal loan you apply for may also impact your approval odds and interest rate. For example, lenders that specialize in providing personal loans to borrowers with bad credit typically have more lenient requirements than lenders that offer these loans to borrowers with excellent credit scores. Additionally, it’s important to shop around for the best rates and fees. You can do this by using a personal loan prequalification tool, which uses a soft inquiry on your credit and won’t negatively impact your score.

It’s also important to be honest on your loan application and not provide any false information. Doing so could lead to an adverse action letter, which can have a negative impact on your credit report and your ability to obtain future financing. It’s also a good idea to avoid making any major changes to your finances or obtaining new lines of credit while you’re in the process of applying for a personal loan, as these can trigger underwriting snags.