Have you been considering taking out a personal loan but are afraid it might put you into bad debt? It can be pretty distressing, but as long as you know the ins and outs of personal loans, then you’re good to go. Speaking of, here are a few tips you should keep in mind when taking out a personal loan and to avoid common pitfalls so you can reach your financial goals.
First things first: understand the costs and terms.
Whether you’re taking out a personal loan in Australia or anywhere else, it always comes with respective terms and conditions. You can expect to read some of the factors below, so pay attention to the following:
Interest rates. Financial institutions and lenders have a set interest rate that determines the cost of your loan. Each of them has its own rate and offers, so choose one that best suits your preferences and needs.
Repayment terms. Along with the interest rate, take note of the repayment terms as well. Fortunately, personal loans have a fixed rate and payment plan, so you just have to consistently follow through with the said plan to not incur additional fees and penalties.
Fees. Speaking of fees, make sure you read through the whole agreement and keep an eye out for fees or additional costs. Some lenders charge additional costs and even a steep penalty if you’re not careful.
Collateral. Make it a habit to check if the loan you intend to take out is unsecured or secured because if it’s the latter, you will be required to pledge an asset. Usually, it’s either a car or a house, which will be forfeited in the unlikely case of default. On the other hand, secured loans have lower rates compared to their counterparts; just make sure that you can carry out your payment in time and to full term.
Work out a repayment plan.
Now that you have the basics covered, one of the things you also need to do is create a solid repayment plan. In this way, you can avoid penalties for late payments and minimize, if not avoid interest charges.
Create a budget. Never underestimate a good budget, and in this case, make a detailed one at that. Keep track of your income and expenses so you can properly allocate your funds. If possible, you can also cut back on unnecessary spending to free up some funds and funnel it to your loan repayment instead.
Prioritize repayment. Having a payment plan means you have to stick to it, and that also means prioritizing your loan repayment. If possible, set up automatic payment so you won’t forget your monthly dues and ensure you pay on time.
Limit unnecessary debt. This is a no-brainer, but as much as possible, try not to take out one too many loans. Focus on one and prioritize repaying that since it could lead to bad debt and leave your finances in disarray.
Common pitfalls you need to avoid.
Unfortunately, sometimes it’s not enough to create a payment plan since there are a few plot holes you need to be aware of, which include the following:
Ignoring the terms. Reading the terms and agreements is important so you can check if the lender has any clauses or inserts that mention hidden fees or penalties.
Failure to pay on time. You might think that penalties for payment would be the worst thing that could happen to you during your loan term, but keep in mind that doing so would also damage your credit score and incur additional fees.
Overborrowing. Make sure to only borrow what you need. As much as it’s tempting to take out a bigger loan, keep in mind that this is only borrowed money, and you have to stick to the repayment plan unless you want to pay more in the long run.
Taking out a loan for non-essentials. People usually take out a personal loan for big purchases like home renovation, medical expenses, and even emergencies. With its staggered payment plan, they can avoid shelling out a large amount of money. If you plan on making small purchases, you’re better off using a credit card, and you can also pay the minimum charge when it comes to billing. Just keep in mind that if you opt to do so, you will incur interest charges, which will lead to more payment.
To wrap it up, a personal loan is a useful financial tool as long as you’re aware of its full terms. By creating and sticking to your budget plan, you can avoid unnecessary payments and reach your financial goal without a hitch.
Also Read: What Are the Key Differences Between EIN Loans and Personal Guarantee Loans?
