Last updated on November 20th, 2019
Taking out a personal loan is a popular way of getting extra money when you need it. Loans tend to have lower interest rates than credit cards and they are usually flexible when it comes to what the money can be spent on.
If you are thinking of borrowing money, you need to understand what you should and should not do. This helps you to decide the best choice of loan as an alternative to using a credit card. Here are some of the important dos and don’ts to pay attention to when you are thinking of applying for a loan.
Do Plan Your Budget Beforehand
You should never take out credit of any kind before you have a monthly budget in place. There is advice that you can get if you are struggling to create an effective budget. The most important thing to remember is that you need to take account of all the income you have coming in and all the expenses that you have to pay.
This allows you to make sure that you have enough money to meet all of your expenses. It also shows you how much money you have left after all payments have been made.
Once you have a budget in place, you can then work out how much money you can afford to borrow. It’s important to be realistic when you do this as you do not want to leave yourself in a difficult financial position in the future.
Do Compare Interest Rates
Loans have a variety of interest rates available. This is why you need to shop around so that you do not end up paying more than you need to. Look for the lowest interest rates available and then check for other costs, such as…
Do Examine All Associated Costs
It’s not just loan interest rates that you need to pay attention to. You should also check for other costs such as prepayment penalties and compulsory insurance. These can often be well hidden so you need to read all of the conditions in detail. This is important as these costs can make a loan much less appealing.
Do Consider Secured Loans As An Option
Secured loans, such as mortgages, usually come with a lower interest rate than personal loans. Therefore, they are worth considering. You may be able to release equity on your home instead of getting a personal loan. However, if you miss payments there is a chance that you could end up losing your property. You need to weigh up the positives and negatives before you make a decision.
Do Not Borrow More Than You Can Afford
No matter how much you need the money, you should never borrow more than you can afford to repay. This is why it’s so important to work out exactly what you will be expected to pay each month, before you sign for a loan.
In order to do this you need to know how much the payments will be, how much interest is payable and what the term length is. Only ever accept repayments that will allow you to continue living life without having to struggle financially each month. If you do not do this you could end up dealing with the misery for years to come.
Do Not borrow Money From Friends Or Family
Borrowing money from friends or family is never a good idea. It may be well-intentioned but it can lead to the destruction of relationships. For instance, friends may expect you to relinquish other activities in order to make repayments. If they see you enjoying a night out they may be resentful, especially if you are not up to date with agreed repayments.
It’s also possible for friends and family to experience their own issues. This may lead to them needing repayment early. That can put a big strain on the relationship.
Do Not Use A Co-signer Unless You Have To
Having a co-signer in place can make it easier to get a loan. However, this is not necessarily your best option. It’s important to remember that their financial security could be at risk. If you fail to make repayments for any reason, they are responsible for making up those payments. You may think that this is never likely to happen but you do not know what the future has in store.
Do Not Ignore Your Credit Report
You should never forget how important your credit report can be. Whether you are considering getting a loan right now or not, you should check your report carefully. This allows you to make sure that all of the information on the report is correct. It also allows you to check that you are up to date with payments.
Taking these actions means that you can optimise your credit score. This makes it more likely that you will be accepted for a loan should you want to apply for one.
Loans can give you extra flexibility when it comes to making important purchases, or dealing with emergency situations. However, you need to choose a loan carefully in order to make sure that you get the best solution for you.
Start by making sure that you have a realistic budget in place so that you know how much you can afford to borrow. You then need to research different loans that are available. As part of your research you should consider interest rates and additional costs, such as prepayment penalties. Having this information in front of you allows you to choose the option that is best for your needs.
You should never be tempted to simply opt for borrowing money from friends or family because it seems more affordable. Doing so can cause a lot of problems down the line. The most important thing to remember is that you should never take on more debt than you can afford and that you should have plans in place to make sure that you make payments on time. This allows you to benefit from a loan without creating problems for yourself.
Andrea Schmidt is a staff writer for Wealthy Turtle. She’s a stay at home mom who loves to write about paying down her family’s debt, living on a budget, and exploring new side hustles to earn extra money.