Everything You Need to Know About Using Personal Loans
The increasing number of loans and financing options available on the market is a clear sign that the market is growing. More people use loans for various purposes, so it is only natural that lenders start to offer more – and better – deals as a way to respond to the growing demand.
When used properly, certain financing options are handy personal financial instruments to have. There are a lot you can do with a good personal loan. You can even use personal loans for productive purposes such as starting your own business.
That phrase, “when used properly,” is actually the important part. In the right hands, loans are great for leveraging your personal financial ability and taking it to the next level. Before you get started, here are everything you need to know about using personal loans.
Term of the Loan
Not all personal loans are created equal. Some of them are designed for long-term use. They allow you to extend the loan to up to 5 years – or even more, in some cases – and leave you with a manageable monthly repayment amount. Other personal loans are more for short-term use.
Understanding the nature of the loan according to its term is important. This will affect how you compare personal loans and how to benefit from them the most. A loan designed for short-term use will have a higher APR, but that’s because you are not supposed to utilize the loan for a full year.
Choosing the right term for your next personal loan is also important from personal financial management standpoint. You want to make sure that the monthly repayment amount is affordable, but you don’t want to extend the loan too much that it becomes expensive to use.
The Cost Structure
Speaking of personal loans becoming expensive to use, it is also important to fully understand the cost of using the loan. You can start by reviewing the interest rate of the loan, since this is the most straightforward cost element to review.
The Annual Percentage Rate or APR depicts the cost of using the loan in a more objective way. It takes into account other fees and charges associated with the loan. The APR is usually higher than the base interest rate of a loan for this reason.
There are also other fees and cost elements to consider. The origination or establishing fee is an important cost element because it affects the overall cost of the loan substantially. Underwriting fee, appraisal fee, and processing fee are also worth considering.
The Payment Structure
For maximum flexibility, you want a personal loan that you can repay in a comfortable way. This means getting a monthly repayment amount you can actually afford while limiting the fees associated with the loan. Remember that personal loans – or rather missing a payment for a personal loan – affects your credit history substantially.
You also want to check if there are prepayment charges that come with the loan. This is the fee you have to pay when you want to settle the loan early. Consult the lender about how you can repay the loan early and if it is possible to pay more than the predetermined monthly amount to repay the loan faster.
Comparing personal loans before deciding to apply for one is a must. By comparing deals from multiple lenders, you can settle for the most affordable personal loan on the market. You also have more freedom to determine the repayment structure and other details about the loan. Mention that you are comparing deals from multiple lenders and you may even land an extra discount or two on your interest.
That said, finding the right loan is only the beginning. To fully benefit from using a personal loan, you also have to keep these tips in mind:
- Borrow only the amount you need, not the amount you want. Some personal loans offer higher credit limit. While you can take out more than £50,000 in personal loan for different reasons, you should not always apply for the maximum amount if you only need a small loan for a short period of time.
- Control how you use the loan and make sure repaying the loan does not affect your monthly budget. This means keeping all loan repayments below 30% of your income in an ideal situation. If you are spending more than half of what you make to repay loans and bills, you are looking at a potential financial issue and you need to start taking steps to improve.
- Work with a reputable lender. This is another must-do if you want to benefit more from the personal loan. Great lenders work with you, even when you run into issues trying to repay the loan.
Now that you know these essentials, making the most out of the available personal loans becomes easier. The next time you need to finance a big purchase or a gap in your budget, you can turn to personal loans for help.