Personal loans can be a Godsend in times of financial emergencies. The best thing about Personal Loans has to be the fact that they are so quick to process. Furthermore, you can obtain them for absolutely any purpose. This free reign has gotten many people into big trouble. People tend to spend big on things that they cannot afford just because the cash is available on short notice. However, if you are careful to spend personal loan on only the most important and urgent requirements, you will find that they are quite useful and harmless. Here are some of the most important things to consider before taking a personal loan.
Need or greed?
Before you begin your research, take some time to really think if you need the loan. Is it for some emergency like paying educational bill, hospital bill etc. that you simply cannot avoid? Or are you looking for investing in commodities and stocks? If it is for the latter, it is a risky leap to take and is not recommended to take a personal loan.
When you apply for a personal loan, the lender will definitely dig up your past, and by that we mean your credit reports. The credit reports will decide whether you are eligible for a loan and if so, how high the interest rate will be. So it is a good idea to find out your scores so that you get a rough idea of what interest rate you will be eligible for.
Look Around
Look at different lenders’ offers before you settle for one because there are so many out there with different terms. It is easiest to apply online. There are sites that you can fill out an application and they will forward it to different banks. This makes your job easier than physically visiting multiple banks to compare several rates. In addition, the approval levels are generally higher when you apply online.
The total amount that you fish out is not just the interest and principal amount. If you look carefully at your personal loan offers, you will find the ‘hidden fees’. Even if a lender charges a low interest rate, he may make up the difference with a high fee. Thus, you must compare the total cost of the loan and not merely the interest amounts.
You should find out how much you can afford to pay monthly as interest before applying for a loan. To figure it out you should set up a budget. Once you have figured out the monthly amount that you can afford, the next step is to find a loan agreement that lets you pay back the amount as fast as possible without going over your budget. Remember, the longer the term of the loan, the more interest you pay.
It is not good news for lenders if you pay back the loan amount earlier than the proposed time because they lose out on the extra months of interest you would have paid. Therefore, certain lenders will charge penalty fees if you pay back the loan early. If possible, choose a lender who does not penalise you for preclosure. Unless you can pay back the loan and fees early and this will save more money in interest payments than what you pay in fees.
You can go for variable or fixed interest rates when you take a loan. Fixed interest rates are usually higher than variable interest rates when you take out the loan initially, but the amount you pay as monthly loan payment will not change. Compare this to the variable interest rate, which at first look may seem lighter on the pocket. The variable interest rate may be low initially, but as the interest rate changes your loan payment changes too. Thus, fixed interest rate is a safer bet.
Loan insurance comes under various aliases such as payment protection insurance, credit protection insurance, loan repayment insurance etc. Basically it is an insurance which covers you when you cannot make a loan payment for some reason. Some people do not think it is worth spending on this insurance, while others think it is vital. Incase you think it is worthwhile, make sure that you look for different quotes and then take your pick instead of assuming that the lender is offering the best price.
Secured vs. Unsecured Personal Loans
The interest rate you get for an unsecured personal loan is higher than that of secured personal loan. This is because the lender is at a much higher risk when he gives you a loan without using a collateral. If you have any asset and can use it as collateral to secure the loan, chances are that you will get a better interest rate. However, this means that your asset will be at risk in case you cannot make the loan payments in time. This is another reason why you should make sure you can afford the loan payment before taking a loan.
By providing all your financial documents, you will help the lender get a clear picture of your finances. This could save you money when getting a loan. The lender may charge a higher interest rate because they did not have some vital information regarding your finances. Keep handy, all the documents that the lender requires like checking account statements, title, deeds, tax forms etc.
There are so many choices when it comes to taking a personal loan (much like everything else in life), thus making your choice difficult to make. However, in times of need, a personal loan can be a huge help. Don’t assume that you are at the mercy of the lender when it comes to getting a loan. There are so many options you can go for. The lender needs your business and you are the consumer, so the lender should discuss with you to get a deal that you are comfortable with. Make sure you don’t base your decision on a sales pitch, but rather make a decision which makes financial sense.