There are so many reasons you might find yourself seeking out a personal loan, whether it’s to buy a new car to keep your family safe, or in order to consolidate your debts into one. People even take out personal loans in order to help improve their credit score so that they can take out a bigger loan for a big, key purchase such as a new home. There are so many ways that a carefully chosen and managed personal loan can help enrich your life. Whether this is your first personal loan, or your tenth, we’re going to share 5 tips for making the most of your personal loan:
1. Be Realistic About Your Repayments
As a general rule, you don’t want your repayments to be more than 10% of your monthly income. This year has proven to many of us that things are not as stable as we once thought, so it is even more important to be mindful of how you would make repayments if your income was to drop or your wage to fluctuate. The lower the repayment is as a percentage of your total income, the better, but you should sit down and calculate how much 10% is and be sure to not go above that, even if it means taking out a smaller loan than you had originally anticipated.
2. Compare Loans Before You Commit
One of the best things you can do before committing to a personal loan, is comparing the options and rates available from a few lending providers. Now you can easily compare personal loans online, making it easier than ever before to see a range of options and their respective benefits and consequences. One of the most important things you’re going to want to look into, is the interest rate. Over the course of a few years, or even a few decades, a small difference in percentage can result in a difference of thousands, or even tens of thousands of dollars. I like to use online repayment calculators to plug in different data to see how it impacts the repayment amount, terms, and overall interest paid. As a general rule, the lower the interest percentage, and the shorter the term, the less you’ll pay.
You may also want to Google the companies to see what kind of reviews are available online for previous and current customers. Bare in mind that most people will write things when they’re unhappy with a service, but very few will write for positive things. Be careful to check through the negative reviews to see if there are any issues with extra charges, or hidden fine print in the lender’s contracts. It can give you some clues of things to look into before you commit to borrowing from them.
3. Don’t get a Personal Loan for Frivolous Spending
While it can be tempting to get a loan for frivolous spending, such as birthdays, or Christmas, as a general rule it is much better to reserve personal loans for things you really need. If your finances aren’t quite where you’d like them to be this year, do a more simple Christmas celebration or more modest gifts. As they say, it’s the thought that counts and I’m sure no one would want you going into debt for a holiday or celebration. There are many things that are important investments, and that often warrant a personal loan, such as getting a new car, investing in a home, or even going to college. At the end of the day it’s going to be a personal choice whether something is a worthwhile reason to take out a loan or not, but I think you need to think long term. Will whatever you want the loan for help improve the quality of your life, your earning potential, your safety and stability? If the answer is ‘yes’ to answer of these questions, then it may be the right time for you to get a loan for these things.
4. Keep Your Credit Score in Mind
Depending on where in the world you live, your credit score will be measured in a different way, but it tends to be an important factor. In some countries you can easily look it up, and in others it will be more something that’s communicated between lending institutes to decide what kind of risk lending to you has, and what kind of interest rates and loans will be available to you. No matter where you are, there are things you can do to ensure your credit score is as good as possible. Things such as keeping up with your regular monthly repayments and not falling behind. Not applying for new types of credit more frequently than every six months. Making repayments on credit cards that are above the minimum and so forth. You basically want to ensure that you demonstrate that you’re a good borrower and likely to pay back any debts. If you’ve recently taken out another loan, line of credit, or credit card, it may be worth waiting a few months to take out your personal loans online so you’re not impacting your credit score.
5. Go for a Short Term
Aside from shopping around for the best loan deal and lowest interest rate, there are only a handful of ways you can help minimise how much you’re repaying. One of the best ways to reduce the overall interest you’ll pay is by choosing a shorter term loan. The longer you pay, the more interest you’ll pay over the course of the loan. It is a bit of a balancing act, between what you can afford to repay each month in the form of repayments, but the faster you pay off your loan, the less overall you’ll pay. It can be surprising how much of a difference a small repayment increment can make, such as an extra $10-20 per month. It can knock months or even years off your repayment term, depending on the initial loan amount. Once again this is something that’s worth plugging into a repayment calculator so you can clearly see how much a shorter term will benefit you.
A personal loan can be a great way to get ahead, to find funding for something you really need, or even for helping you to minimise how much interest you’re paying on existing loans. Hopefully these top 5 tips for making the most of your personal loan give you some good ideas for how to maximise the value of your loan.