Beware these common pitfalls when taking out a personal loan.

Sourced from: money.howstuffworks.com

Taking out a personal loan (which is an unsecured installment loan that can be used on anything) is one way to borrow money typically at a lower rate than credit cards.  This can definitely be a big help in many cases, such as starting a small company, paying for a wedding, or dealing with burdensome medical expenses.

Personal loans, however, do have risks that borrowers should be aware of.  To reduce you risk, avoid the following four mistakes that people often make with personal loans:

1. Not shopping around.  In many cases, lenders terms and offers vary greatly.  It is always in your best interest to talk to multiple lenders and find the best rate and terms for your situation.
2. Not watching out for hidden costs. Be sure to ask about any fees that may pop-up during the loan process.  Understanding the entire expense of the loan (including upfront fees) will help you compare lenders more accurately.
3. Borrowing too big a sum. Although it can be tempting to borrow as much as you possibly can, don’t forget that you’ll have to pay it back – with interest.  The more you borrow, the more interest you’ll be responsible for paying, so make sure to borrow exactly the amount you need and not much more.
4. Missing payments.  Missing a payment on a personal loan may not mean your house could be foreclosed on, but it could mean getting reported to the credit bureaus.  This can definitely negatively affect your credit score, which will impact your ability to borrow money in the future.  Set up an automatic bill pay and never miss a payment.

Although a personal loan isn’t the answer for everyone, if you do decide to take one out, make sure avoid these mistakes.  Your long term financial security will thank you!