There is a myriad of reasons why someone may need a personal loan at one time or another. Some use personal loans as a tool for debt consolidation while others may need to use this type of loan for emergency medical expenses or even major purchases.
No matter your reason for taking out a personal loan, there are important factors to take into account before you apply for and accept a personal loan. Let’s take a look at a few.
Personal Loan Dos
Do Automate Repayments
Automation can be your ally if you have debts to settle. Setting up automatic transfers for your loan payments and bill payments will help you resist the urge to:
- Overspend on other unnecessary things
- Make the minimum payment only
- Skip on payments
Sometimes the biggest problem with repayments isn’t affordability but more the discipline required to prioritize the debt. With automated payments, you can stay focused on paying your loan back.
Do Your Homework
Remember that interest rates are a part of all loans and should be included in your calculations. Therefore, you should only get a loan for a good reason.
Popular explanations include unexpected medical costs, home improvements, purchasing a new gadget when needed, etc.
Obtaining a personal loan for travel or purely recreational activities is acceptable, but you must ensure you can afford to pay it back (we’ll cover this in more detail in the next point).
Do Budget for Your Repayments
Your loan will include a principal amount, an interest component, and additional fees like processing fees.
Will your monthly income be sufficient to make timely and successful payments on the installments each month?
Make a repayment strategy, even if it’s a rough one. Utilize an equated monthly installment (EMI) calculator while considering your potential future income (raises, bonuses, etc.), potential expenses, and more.
Do Shop Around & Compare
Interest rates and other loan terms vary by provider. By shopping around between lenders, you can evaluate a variety of loans to find the best one for your circumstances. Remember that personal loan interest rates may vary based on:
- The bank’s lending rate
- Loan size
- Term
- Assessment of your unique qualifications (like income and credit score)
These factors determine your loan’s interest rate and repayment terms.
Personal Loan Don’ts
Don’t Use Informal Service Providers
There are several lenders in the market today; unfortunately, not all are legitimate. Unregistered lenders may charge high fees without cause. Always read customer reviews online and do your homework on the lender before selecting a personal loan.
Don’t Pay Late
Late payments on loans have lasting consequences. In addition to raising the interest you must pay, late payments lower your credit score.
As a result, your borrowing will be more expensive for as long as it takes you to pay off your debt. It may also cause your lender to impose late payment fees and raise your interest rate.
Don’t Overborrow
Banks profit from charging interest on loans, so they might grant you a bigger personal loan than you requested. The best practice is to only borrow what you need.
Remember that even though they may claim the monthly payment will not change, the term will be longer, and you will pay more due to interest accumulation.
Personal loans may be necessary for many people at some point in their lives. Like most things in life, they can cause more harm than good if not used wisely. These dos and don’ts can help you take advantage of personal loans without getting yourself into financial hot water.