Personal loans can be a great tool when the going gets tough, or when you need extra cash to take care of immediate expenses. However, they can also be disastrous if you overpay them or fail to make payments on time. Understanding how personal loans function can help you avoid making costly mistakes and maximize your return on investment. Here are some common mistakes to avoid with personal loans.

Exaggerating your debt to income ratio. Personal loans can be a great way to consolidate debt from multiple credit cards and auto loans into one lump sum. The debt to income ratio is a calculated ratio that measures your debt to income at a certain point in time. By using an APR calculator, you can calculate your exact APR for each individual loan. But be careful to compare your individual results to your actual debt to income ratio at the start of each month to ensure that you are truly comparing the right personal loan term to your total debt.

Misreading the terms of the personal loan contract. Your contract can easily be too confusing for people who have never taken out a personal loan before. Before you sign up for any personal loan, read the fine print to make sure that you understood every term and condition. If you aren't sure about any term, visit ask a question before signing or refuting any information within the contract. Most financial institutions offer free online copy of their contracts. If a financial institution offers you a free copy, chances are that it is a legally binding contract.

Examine your credit rating. When you apply for personal loans, you will likely be offered terms by various lenders. You may offer your credit score as a form of collateral, or you may offer an equivalent number of lower-rated items (such as low-interest savings accounts or certificates of deposit). When you are offered a personal loan, lenders will evaluate your credit ratings and may offer you a personal loan with terms that make financial sense.

Borrowers with bad credit will need to consider a few things before applying for a personal loan. Borrowers with bad credit should consider obtaining a secured personal loan from a non-bank lender. Many non-bank lenders offer secured personal loans for borrowers with bad credit. This type of personal loan usually requires borrowers to put up collateral (like cash) that they can use to obtain the loan, in exchange for a high interest rate. While these loans generally offer better rates and terms than bank loans, many borrowers choose not to take this type of secured personal loan because the interest rate is often so high. In order to ensure that you get good interest rates on a bad credit secured personal loan, you may want to consider working with a bank that offers bad credit loans or applying with a non-bank lender.

It's important to realize that there are different ways to apply for personal loans. The traditional personal loan application includes a credit check, a request for collateral and a short application form. These basic elements make the process of obtaining a personal loan quick and easy. However, many borrowers who have poor credit histories and high interest rates are concerned that they cannot receive these types of loans because of their credit scores and lack of collateral. The good news is that personal loans work for borrowers regardless of their credit scores and financial profiles.

If you have an excellent credit score, you may be able to find several lenders willing to offer you personal loans without requiring any collateral or completing any complex forms. Your best option when looking for financing for any reason is to work with a reputable online lender or credit union. Online lenders and credit unions have lower interest rates and loan terms that are more favorable than those offered by banks. Although it's difficult to obtain unsecured personal loans, you may be able to find a personal loan through an online lender or credit union that is right for you.

Credit unions and online lenders offer personal loans offer fixed monthly payments that you can budget into your monthly budget. You'll be able to make larger payments if you need to pay off your credit cards faster. If you're refinancing credit card debt, you'll be able to do so much faster with a personal loan because you can spread out the cost over a longer period of time, making it easier to manage. Regardless of your credit history, a personal loan offers you flexibility in your finances.