Personal loan application; image via, CC BY-SA 3.0, no changes.
Personal loan application; image via, CC BY-SA 3.0, no changes.

No matter how you try to avoid getting a loan, there will be times when you may fall short of your budget. It could be due to an unexpected home repair, sickness in the family, or an essential purchase. Thankfully, securing a cash advance at flexible rates is easier these days.

But with all the many types of personal loans out there, it could be difficult to find the best option for you. You might find loan packages that are too good to be true only to get caught up with high interest rates.

Here are some of the costliest traps to avoid when getting a loan:

Small monthly fees for a longer term

The majority of lenders will tempt you to take a bigger loan than what you initially sought. However, unless you need it, you shouldn’t go overboard. Remember that it is still a loan and you have to pay it off. Another trap many borrowers fall into these days is small, monthly fees at a longer term. Lenders will often convince you to choose longer payment terms to greatly reduce your monthly repayments. It may sound beneficial to you but it’s actually not. You will just end up paying them more because of the interest. Go for a shorter repayment term to keep down those costs.

Origination fees

Most lenders charge an origination fee so there is really no avoiding it. To know if you are making a good deal, check the annual percentage rate, not just the interest rate, as it includes the origination fee. There are two ways in which you could get stuck with a fee. First, the lender reduces the origination fee from your loanable amount without you knowing. For example, if you borrow $10,000 and there’s a 3% origination fee, the lender subtracts $300 from your loan, so you only get $9,700. But then, when you pay off the loan, you will be charged with an interest rate based on your $10k loan. Second, you don’t get a refund of your origination fee if you prepay your loan. In most cases, the origination fee is like a disguised prepayment penalty.

Prepayment Penalties

Look for lenders that do not charge a penalty in case you decide to pay off your loan early. Prepayment penalties are often the sum of the pre-computed interest and origination fees. Before you sign the contract, ask the lender about their prepayment policy.

Picture of a tablet explaining interest rate; image via, CC BY-SA 3.0, no changes.
Picture of a tablet explaining interest rate; image via, CC BY-SA 3.0, no changes.

Variable interest rates

As much as possible, you want to go for personal loans with fixed rates. A variable interest loan is a loan in which the interest rate varies, depending on the market interest range. On the other hand, a fixed rate loan is that which has a fixed interest rate throughout your loan term, regardless of the change in the market interest range. Most personal loans have a fixed rate, but do watch out for variable interest rates.


Most people look at the APR alone when comparing loan offers. However, APR can be manipulated by lenders. To ensure that you are getting the best deal, check the total amount repayable (TAR) instead. This refers to the total cost you will pay from the start to finish of your loan, covering everything, including the interest and charges.

Loan add-ons and other gimmicks

Some lenders will entice you with all sorts of gimmicks like cashback and payment holidays. These may sound like great deals, but these are meant to make you pay for more. For instance, loans with cashback are expensive and you lose it if you pay your debt early. Payment holidays, wherein you get a month or two break from making your payments, are really sneaky because the interest will still build up in that time. Be careful about the different add-ons lenders offer you. Loans should be simple and designed to meet just what you need.

Personal loans are no doubt a life-saver in many instances. However, you have to do your research to find the best deal. Not all loans are the same. Always read the fine print of the contract so you can avoid sneaky deals that could lead to massive interest rates and charges. Don’t jump into picking a personal loan just because it promises an easy repayment system. The shorter the repayment period is, the better the deal. Check the lender’s policy on charges, repayments, and interest rates, and consider the TAR when comparing loan packages. Lastly, don’t fall into the traps of add-ons and gimmicks, as most of these are designed to make you pay for more.

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