Small loans can be a quick solution to cover expenses, manage short-term cash flow or bridge financial gaps. Yet, while the common advice for these loans – like comparing interest rates and understanding loan terms – is essential, there are many lesser-known tips that can be just as valuable to help you borrow smarter.
In this article, we will dive into some often overlooked but crucial insights that can make a huge difference when it comes to successfully navigating small loans.
Recognise the Impact on Your Credit Score
When you apply for a small loan multiple times in a short period, each application can temporarily reduce your credit score. This is because each application triggers a “hard inquiry” on your credit report. This can negatively affect your credit score if done frequently. Many borrowers don’t realise this risk, which is probably why they apply to multiple lenders in the hopes of increasing their chances of approval.
Pro Tip: Be selective with your loan applications – research pre-qualification options that don’t affect your credit score. A few lenders offer a soft inquiry pre-qualification process that allows you to see estimated rates without impacting your score. You can shop around safely this way while keeping your credit health intact.
Always Read the Fine Print, Even for Small Loans
Some small loan agreements come with complex terms and hidden fees that can catch borrowers off guard. These may include early repayment penalties, service fees or clauses that could impact repayment flexibility. Don’t overlook these details even when you’re focused on securing funds quickly. Read the fine print so you avoid unexpected costs down the line.
Pro Tip: Carefully review each clause in your loan documents. Don’t hesitate to ask the lender questions about unclear terms. Get clear answers on fees and policies to avoid surprises and make a fully informed decision.
Get Insights from Loan Brokers
Borrowers often apply for loans without getting advice from loan brokers, who specialise in understanding the nuances of different loan products. A loan broker can help you evaluate small business loans, personal loans or any other small loans that are ideal for your needs. They will also check if there is a more suitable alternative to what you’re considering. With their knowledge of various lenders and loan structures, brokers can give useful insights on choosing a loan that aligns with your financial situation and goals.
Pro Tip: Reach out to reputable loan brokers, like Muscle Money, for personalised guidance on borrowing options. They offer initial consultations free of charge and help you understand potential loan products and repayment strategies to help you make an informed decision.
Plan for Unexpected Expenses
One common pitfall of loan repayment is the lack of a financial cushion for emergencies. Life can throw unexpected costs your way – car repairs, medical expenses or other unforeseen bills. Without a buffer, these situations can put additional strain on your budget. This can make it challenging to keep up with loan payments.
Pro Tip: Ensure your budget includes a buffer for unforeseen costs. Set aside even a small portion of your income each month for an emergency fund that can support you through rough patches. This cushion can help prevent you from falling behind on your payments.
Understand the Consequences of Defaulting on a Loan
Not all borrowers are fully aware of the repercussions of defaulting on a loan. This can range from credit score damage to legal consequences. Understanding these risks can help you make better decisions and approach borrowing with a plan to avoid default.
Pro Tip: Familiarise yourself with the consequences of missed payments and work with your lender if you anticipate repayment challenges. Ask about repayment assistance or modification programs to help you stay on track. Don’t wait to reach out for help if needed.
Muscle Money Can Help You Make Informed Decisions on Small Loans
Navigating the world of small loans involves more than just securing quick cash. By understanding these lesser-known tips – impact on credit, the importance of reading the fine print, etc. – you can make smarter borrowing decisions. A proactive and informed approach will not only help you meet your immediate needs but also protect your financial health in the long run.
If you want to learn about small loans, car loans, personal loans and more, contact us so we can assist you with your financing needs.
Caleb Waye-Harris, Senior Manager of Asset Finance at Muscle Money, has almost 15 years of relevant experience in the finance industry. His extensive background includes project management, consumer and commercial lending and asset-based lending.
