Personal loans are a versatile option to cover big expenses. They typically have lower rates than credit cards — but they aren’t without their risks.

You should also know your credit score and have a budget for paying back a loan before you apply. And it pays to research. Comparing the best offers with the lowest fees or other penalties will put you in a good position to find a lender that works for your needs.

1. Taking out a longer loan than necessary

A longer loan term means a lower monthly payment. The catch is that the lender will have more time to collect interest from you, which means the loan will be more expensive overall.

To illustrate, if you borrow $10,000 for 36 months at 11 percent, here’s what to expect in terms of monthly payments and loan costs.

Loan term Monthly payment Total interest paid
3 years $327.39 $1,785.94
5 years $217.42 $3,045.45

That’s a difference of $1,259.51 in interest.

If you can, it’s best to choose a personal loan with a shorter repayment term to avoid paying a fortune in interest. And if you’re worried you can’t afford the monthly payment, use a loan calculator to determine your budget. You may have to borrow less, but your wallet will thank you.

Takeaway: While long loan terms result in lower payments, a shorter term means less interest paid to the lender — which means you save money.

2. Not shopping around for the best offers

If you desperately need cash, it could be tempting to go with the first lender you find that approves you for a loan. Unfortunately, this could also be a costly mistake. There is no way to know if you’re getting the best deal or if there are better options out there.

For example, here’s what you’ll pay for a 36-month, $15,000 loan with different interest rates.

Type of financial institution Interest rate Monthly payment Total interest paid
Bank 12 percent $498 $2,935.73
Credit union 8 percent $470 $1,921.64

Based on this illustration, getting a loan with a credit union saves you $1,014.09 in interest over the life of the loan.

The upside of shopping around is that there are ways to explore loan options from banks, credit unions and online lenders without impacting your credit score. You can use a loan matching tool to view potential offers in minutes. Some lenders also let you get prequalified online and view loan offers with no credit check.

Takeaway: Most lenders have preapproval processes so you can quickly compare rates without harming your credit. So even if you’re crunched for time, you are still able to find the best offer.

3. Not considering your credit score

Lenders want to know that you can afford to repay what you borrow, which is why most require you to provide employment and income information. But your creditworthiness, or the likelihood of you paying back the loan on time, is also important.

The most competitive interest rates generally go to applicants with good or excellent credit scores. But if your score is low, you may get an exorbitant interest rate and spend several hundred or thousands more in interest. The lender might also deny your application.

Consequently, you should check your credit before applying for a personal loan to avoid any surprises. If your credit score is on the lower end, it’s worthwhile to explore other options to get the cash you need. In the meantime, review your credit report and file disputes if you notice inaccurate or outdated information that could be dragging your credit score down.

Takeaway: Some lenders have minimum credit score cutoffs. If you don’t meet these, it is better to wait before applying and focus on improving your score first.

4. Overlooking fees and penalties

Some loans come with fees that could be costly if overlooked, including:

  • Application fees are the amounts the lender charges prospective borrowers to apply for a loan.
  • Late payment fees are the amounts you’ll pay if you remit payment after the cutoff time on the due date (or after the grace period).
  • Origination fees are the processing fees assessed by the lender to set up the loan, and typically range from 1 percent to 8 percent of the loan amount.
  • Prepayment penalties are the fees the lender charges if you pay the loan off early.
  • Returned check fees are the penalties you’ll be charged if your payment is returned to the lender by your financial institution.

Most of these fees are avoidable if you make timely payments. You should also research lenders that don’t charge application or origination fees. Prepayment penalties can also be costly if you plan to pay your loan off early, so avoid lenders who assess this fee if possible.

Takeaway: Not every lender charges fees, but most will have an origination fee and late fee. When you research lenders, consider how much it will cost you to borrow in addition to the interest rate offered.

5. Not reading the fine print

Before the loan is finalized, the lender will either send closing documents electronically or hand them to you for review. The fine print includes information regarding the calculation of interest, acceptable payment methods, due dates and the fee schedule. It will also say if the lender charges more for certain types of payments or automatically withdraws payments.

You must agree to the terms and conditions and sign the documents before the loan proceeds are disbursed to you. Depending on the lender, there may be several pages to review and sign to close the loan. But if you sign without reading, you risk incurring unnecessary fees and penalties.

Takeaway: You should review the fine print of everything you sign. Otherwise, you could violate the terms of your loan or be surprised by the lender processing automatic payments without your knowledge.

Bottom line

If you decide a loan is necessary, don’t make a decision in haste. That can prevent you from getting the cheapest financing available to you. It also could mean lenders will reject your application.

Ultimately, you want to shop around to find a loan with a competitive interest rate. It’s equally important that you get affordable monthly payments so you can pay the loan off in time and avoid costly consequences in the future.