Have you considered looking for a personal loan to improve your financial health?
If you are overwhelmed with credit card bills or high expenses, then a personal loan can be a powerful solution. Having the ability to pay your bills without needing to worry is an amazing relief.
However, you need to be wary of what a personal loan entails. It’s not a perfect solution for everyone in need and you must be smart about paying it back.
This starts with finding the right personal loan product for you. It should accommodate your situation and have terms that you can manage.
To make things easier for you, we’ll go in-depth about personal loans below.
How Do Personal Loans Work?
The first thing you’ll need to know is how a personal loan works.
You’ve likely heard of a business loan before, which is used to finance business ventures. A personal loan is similar but is used for just about anything that you want.
For example, you might incur major medical bills and have no way to pay them. A personal loan comes in handy here because it gives you flexibility and allows you to avoid bankruptcy.
Personal loans are designed for set periods, typically between one and five years. Longer terms tend to have lower interest rates, but you’ll end up paying more interest overall.
You’ll receive a lump sum of cash upwards of $100,000 to use as you wish. Then you’ll make monthly payments every month across the loan term to recover the debt.
Beyond this, there are two types of personal loans. This includes secured and unsecured loans.
Secured loans have collateral attached to them, meaning that your assets can be seized if you aren’t able to pay back the loan. Unsecured loans don’t have the collateral aspect, meaning that they require better credit to obtain.
Who Is It Good For?
As you can imagine, acquiring a large sum of cash at once can be extremely appealing.
However, the need to pay interest makes this a bad choice if you just want to have a lot of money. You should never take out a personal loan just to go on a shopping spree.
It’s important to remember that you aren’t being gifted with this money. You still need to pay it all back and with interest.
With this in mind, you should know who a good candidate for a personal loan is.
Generally speaking, a personal loan is a great choice for you if you’re looking to consolidate credit card debt, refinance student loans, cover a large purchase, or even just to improve your credit.
Credit card consolidation is arguably the best use of a personal loan. Credit card rates can be quite expensive and this can cost you a hefty sum in interest.
Student loans can also get costly, especially if you have a high-interest rate. Making matters worse, the principal on this figure is typically quite high.
You can also cover large purchases with a personal loan. This doesn’t mean that you should buy a brand new Mercedes. Instead, it gives you the flexibility to finance a rare occasion like a wedding, pay for a child’s college tuition, or something else necessary for your life.
Then there’s the option of improving your credit. This is achievable by changing your debt mix and lowering your credit usage rate.
What all of these speak to is paying off your current debts in favor of acquiring a loan with a healthier interest rate. This means you’ll pay less interest overall and have all your debt in one place.
Have a Solid Plan First
Before agreeing to anything, you should develop a strong plan first.
The reason for this is because you’re making a serious financial commitment. Yes, you’re obtaining a large amount of money upfront, but it isn’t yours and you need to pay it all back.
Considering this, you need to have a strategy for paying it all back. In other words, you need to figure out how you’re going to make enough money to cover what you’re getting.
For example, you might take a $10,000 loan for two years. Say that this comes with a 10% interest rate. This means that you’ll owe $12,000 in total.
If you were to use the full $10,000 at once for something like consolidating credit card debt, then you’ll have nothing left over.
This means that you’ll need to make $500 payments every month to satisfy the loan. If that doesn’t sound like much, remember that this is what you must make after paying for any other expenses.
Few people have the flexibility to save $500 every month. Can you make this happen considering your current job and income level?
If the answer is no, then you certainly should not get a personal loan. Alternatively, if you know that this is doable for you, make a plan and stick to it.
Look for Favorable Terms
The last thing for you to think about is finding favorable terms.
Personal loans can be a powerful solution to your financial problems, but only if you find one with good terms. This means looking for a low-interest rate.
In the example mentioned above, 10% is slightly above the average rate to receive on a personal loan. However, this rate depends on your creditworthiness, meaning that it can be double or triple this if you’re in poor credit standing.
Understanding this, you should only take a personal loan if the rates are lower than what you already pay. For example, 10% on a personal loan is great if you have credit card interest rates of 18% and 24%.
This would mean that you save a significant chunk in interest. Rather than enduring high rates, you’ll consolidate it down to the 10% rate of the personal loan.
If you plan on using a personal loan, look for one with a rate that is at least lower than your current debt and aim for less than 10%.
If you have outstanding expenses or debt that you need to cover, personal loans are a great way of handling them.
A personal loan is a lump sum of cash given to you paid back with interest across a period. This is a great option for anyone dealing with lots of credit card debt, medical bills, or needing to make a big purchase.
While a personal loan can be useful, you need to be mindful of what it means for you. This means creating a realistic plan for paying the loan back.
If you have discipline, then a personal loan can help you right your financial standing. Alternatively, it’s a great way to wind up with more debt if you spend recklessly!
Be honest with yourself and determine if a personal loan can help you save money in the long run.