Personal loans have their pros and cons. Some people like them for being easier to apply for, especially that they require no collaterals. But others are cautious about high interest rates and extra fees. Even if you borrow from a legal money lender, you can still face these disadvantages of personal loans.
Still, you can make use of personal loans wisely. Here are five tips to find out when and how to use them.
When to use them
Personal loans may be chock full of additional fees and high interest rates, especially since they are unsecured loans. With that, you should know when these loans are most useful. Here are two common purposes for personal loans.
Financing large purchases
If you need to make a large purchase, like a high-cost home appliance, furniture, or even educational expenses, a personal loan is appropriate. It can provide a quick and easy source of funds. But always make sure that you have the capacity to pay back the loan, including any extra charges and interest.
For unexpected major expenses
Sudden health emergencies, accidents, or job losses will definitely put a dent in your finances. You will need a helping hand to weather these storms. In these situations, you can use personal loans for financial rescue. They are especially useful in these situations because they require no collaterals and have faster approval times than other types of loans.
How to spend them wisely
Now you know what personal loans are helpful for. The next thing you need to know is how to spend the money you borrowed wisely. This way, you can maximise the value of the loan and avoid losing too much money to interest and charges.
Pay your monthly obligations on time and in full
This is the first rule of thumb when dealing with loans. The more you pay your monthly dues on time and in full, the faster you will be able to pay off your loan. In turn, you will end up paying less in interest and late payment fees.
If you consistently pay on time and in full, your credit score will also improve. This way, you will find it easier to apply for loans in the future.
Create a budget for the money you borrowed
Designate the funds from your loan beforehand. Plan where to use each dollar and stick to your budget no matter what happens. This way, you will not have to take out another loan because you suddenly ran out of funds.
Check for prepayment penalties before deciding to pay off the loan early
Sometimes, you get a lucky break and some extra income flows into your bank account. You may then decide to pay down larger chunks of your loan each month so you can pay it off earlier.
But beware of the prepayment penalty. Some lenders will charge you extra for paying off the loan early. It may sound sleazy, but prepayment penalties are technically legal. Some lenders impose this to cut losses on interest they would have normally earned had you complied with the original repayment schedule.
With that, check your loan contract first if it has a prepayment penalty. If it does, don’t pay off the loan early. You may end up spending more than if you just paid it off following the original schedule.
Conclusion
Personal loans have their uses, and they can be helping hands in tight financial situations. Just make sure you know when and how to use them properly. Follow these tips and you can be sure that you’re making full use of your personal loan.
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