Personal loans can help in certain situations, although when badly handled, they can also be a problem for your economy.
You should always keep several issues in mind before applying for one of these loans, and we will try to summarize them.
Choosing the right reason for the loan
Especially in the 80’s and 90’s of the last century, people resorted very quickly to personal loan financing. It was the era of “happy credit.” Over time, it became clear that living on credit, as many Americans did, was a tremendous mistake for personal finance.
Fortunately, today, any financial advisor will tell you that you should turn to finance only when it is really necessary.
The first step to avoiding making a mistake when applying for a personal loan is to be clear that you need it. That starts with a simple analysis:
- I can’t afford the expense with my resources.
- I do not have alternatives to the expense I want to assume
These two elements are key and should be the reason for a long and deep reflection. After determining the real need for financing, the next step, no less important, is the amount of money you need.
How much money can I borrow?
That is another fundamental step you should consider before borrowing money. We tend to borrow more money than we need. That is a well-known fact in the personal loan industry.
We would need to adjust the amount we are going to request as much as possible and never ask for more money than we require.
Calculating the financing need is very important. In fact, we would say that it is fundamental if you want to optimize this type of financial operation to the maximum. Do not forget that the money is not given to you for free. The loan will always have a cost in the form of interest applied on the amount you have requested. The more money you ask for, the more expensive the product is.
How do you repay the loan?
Many people who take out personal loans worry about the when and not so much about the how. It should be the other way around. Let us explain:
- It’s not about how long the loan will last but what’s in your best interest. With a loan, the longer the period you grant, the amortization will always be more expensive.
- Although the monthly repayments may appear cheaper on the surface, the truth is that the longer the product lasts, the more expensive it will be. That is logical, bearing in mind that interest accumulates as time passes.
Therefore, what is important is to apply the logic of how. That is, how it is in your interest to pay the loan. To do this, you initially need to calculate what repayment installment you can afford thoroughly. If you know you can pay back a certain amount without problems, you should build the loan on amortization.
This way, you would avoid unnecessarily lengthening the loan and pay less interest.
Consider the costs, interest, and penalties
That is another vital element before taking out a personal loan. We should bear in mind that not all loans apply the same interest rates. There are more expensive loans and other cheaper ones. We must always remember this fact since making a financing comparison is as important or more important than any other elements we have reviewed.
Nowadays, numerous platforms allow you to compare different lender proposals. Do not hesitate to use them thoroughly to maximize as much as possible what you are offered and to evaluate all aspects of the loan.
Finally, another fundamental element is to consider the interest applied to the loan and the possible expenses, commissions, and penalties.
For example, there are personal loans whose origination fees are high, while in other cases, they are either not applied or, if certain conditions are met, they are very cheap.
Also, you should pay attention to the penalties in case of delay. Remember that some loans will apply very high fees, even for short periods of late payment. In other cases, the loan will allow you a certain margin and grace period for these repayments.