Personal loans can be a very useful way to help us get access to much needed lines of credit, relatively fast. Whether we need funds to fix a broken boiler or start up a new business, personal loans can help us to get what we need in instances where our savings are simply not sufficient.
However, personal loans do put us into debt, the repayment terms can be fairly onerous and the consequences for not repaying can be ruinous. Therefore it is vital to only ever go into the transaction with one’s eyes wide open. In this post we will look at things to do before taking out a personal loan.
Secured or Unsecured?
Basically there are two different forms of personal lending available, secured or unsecured. Secured lending is when the borrower has an asset to offer up as security or collateral for the loan and in the event of a default, the lender can repossess the asset and sell it to repay the loan. The most acceptable form of security is property but cars, businesses, shares or even jewellery may also be considered. Because lenders consider secured lending to be a much lower risk, they offer larger loan advances and much lower interest rates.
Unsecured lending is where a borrower has nothing to offer in security. Unsecured loans are usually limited in the amounts available to borrow and the interest rates can be very high.
The single biggest rookie mistake a borrower can make is pressing that all elders are the same and going with the first one who they happen to come across. Usually, borrowers presume that their existing bank will give them a good deal on a loan but the opposite is actually closer to the truth.
Instead it is always worth shopping around and contacting a few different lenders to get an idea of what they are offering in terms of interest rates and loan amounts. However it is NOT a good idea to apply for multiple lines of credit or loans as this can undermine a credit score. Therefore choose the lenders you like the best, study their acceptance policies, and then apply to them one by one in order of preference.
Get Existing Finances In Order
Before you take on a big chunk of debt, take some time to carefully review your finances and get them as tight as possible. If you are paying for a gym or Amazon Prime subscription that you hardly use, cancel it. If you are paying a high amount for your gas bill, try and find a cheaper provider.
If possible, you should also repay any existing debt before you take out more too.
Plan How You Will Spend It
When our bank account is suddenly credited with $10k, it can feel tempting to crack open the champagne and treat our friends to slap, expensive meals. But don’t do this. Instead carefully say how much you need to borrow and make sure you know exactly what you will spend the money on.
If you are getting a business loan, identify exactly what your business needs. If you are changing your boiler, get quotes for replacements before you take out a loan so you are only borrowing what you need.
Verify The Terms of the Loan
It is vitally important to carefully study the terms of any loan before completion. These days, lenders are strictly required by their regulators to issue clearly written ‘offers’ that set out the exact terms of the loan in simple terms. Make sure you understand the amount you will have to repay, the interest rate and whether it is fixed or variable, the monthly payments and whether they are fixed or variable, and the number of months you will be repaying for.
Also pay attention to the clauses regarding defaults and make sure you know how to contact the lender in case you run into financial hardship.
Understand Your Repayments
We touched on this above but it is so important that we need to elaborate on it. There are 2 kinds of interest rates available for loans, fixed ones and variable ones. Fixed rates are locked for a certain period or for the entire duration of the loan. The advantage of fixed rates is that you know exactly how much you need to repay both in terms of monthly repayments, and the full amount you will eventually be repaying. The downside is that fixed rates are usually higher than variable rates and if the central bank interest rate drops, you may find you effectively ‘over paying’.
Variable interest rates change and fluctuate along with central bank interest and inflation rates. The advantages are that sometimes the drop means you repay less. However, the downsides are that you never really know how much you are having to have to repay and the monthly payments can go up and down month on month – this can make financial planning impossible. The other disadvantage is that interest rates do rise in periods of inflation (like we are entering now) and can push repayment into unsustainable levels.
Try to find an online repayment calculator like this business loan repayment calculator that will help you see what the month on month payments will be.