After credit cards, personal loans are the most popular type of loan. It’s easy to see why.
Personal loans can offer you from $1000-$50,000 and most borrowers can choose how long they can borrow the money for. Personal loans are one of the few loans that people with bad credit scores can get.
There are three main types of personal loans – Quick cash loans, Payday loans, and Personal Installment loans.
If you are new to the world of personal loans then this article will talk you through the Do’s and Don’t of the process.
#1 – Don’t = miss a repayment
Table of Contents
- #1 – Don’t = miss a repayment
- #2 – Do = choose who you borrow from carefully
- #3 – Don’t = borrow more than you need
- #4 – Do = agree on a reasonable repayment plan with your lender
- #5 – Don’t = take out a loan for investing
- #6 – Do = use a personal loan to consolidate your other debts
- #7 – Don’t = blindly apply for loans
- #8 – Do = Repay early if you can
- #9 – Don’t = let an early repayment fee put you off
This may sound really simple, but you must keep on top of your repayments. Missing a repayment can damage your credit score and you can also incur a late payment fee.
If you can, set up your repayments to be automatic.
#2 – Do = choose who you borrow from carefully
If you are trying to get hold of money quickly, then it can be tempting to apply for every and any loan – without taking the time to research the company you are trying to borrow money from.
While there are a lot of legitimate companies out there, there are many who are not. Make sure that the company you are borrowing from is well-reviewed on TrustPilot and that they are insured. For example, personal loans from CreditNinja.com are insured and they are part of the Online Lenders Alliance (OLA).
#3 – Don’t = borrow more than you need
When taking out a loan it can be tempting to take out the maximum amount of money available to you. But you must remember that a loan is not free money. You have to pay it back and you have to pay interest on that loan as well. When you take out a loan you lose money overall.
So, make sure you are borrowing exactly what you need, and not losing unnecessary money to your interest payments.
#4 – Do = agree on a reasonable repayment plan with your lender
Most lenders let you choose how long you are going to borrow the money for. Some people will be tempted to try and pay the money back really quickly.
If you want to do this, you will need to make sure that your monthly repayments are reasonable compared to what you are earning.
You don’t want to put yourself in more financial trouble trying to pay back your loan too quickly.
#5 – Don’t = take out a loan for investing
The rule of thumb when it comes to investing is to “only invest what you can afford to lose”. If you are taking out a loan to invest then you really cannot afford to lose that money.
Investing does not guarantee a profit, there is just as good a chance that you will lose all that money. If that happens, then you will not be able to pay back that loan, and your finances will be a lot worse.
#6 – Do = use a personal loan to consolidate your other debts
If you currently have multiple debts and find that you are spending a lot of money just on your interest payments. Taking out one loan and using it to pay off all your other debts is called loan consolidation.
One of the major benefits of loan consolidation is that you only have to pay one set of interest every month. A lot of people can save huge amounts of money by doing this.
However, there are some loans you shouldn’t try to pay off with a personal loan.
#7 – Don’t = blindly apply for loans
When you are applying for a personal loan. You should only apply for one loan at a time. This will reduce the number of rejections you will experience.
What a lot of people don’t know is that having a loan application rejected will negatively affect your credit score. Carefully researching the credit requirements for each loan you apply for before applying for it will increase your likelihood of getting the loan. But more importantly, getting yourself a good deal.
#8 – Do = Repay early if you can
Many people get nervous about taking out a loan because they are worried that it will negatively affect their credit score. However, meeting your repayment schedule will improve your credit score. As will paying off your loan early. When you pay off your loan early you will also save money as you will pay less interest on your loan.
Should you use your savings to repay debt early? Read more here.
#9 – Don’t = let an early repayment fee put you off
When you talk to your lender about paying off your loan early they will tell you that there is a penalty for doing so. They do this to try and put you off paying back early because if you do so they will get fewer interest payments out of you.
When they present you with this penalty payment, compare it to how much you would be paying overall (interest included) 9 times out of 10, you will find you will save money by paying the penalty.
When borrowing money you want to make sure that you are borrowing from an accredited lender, only borrowing what you need, and picking a suitable repayment plan. Not doing any of these can cause you more financial trouble.
You also want to make sure that you make your payments on time, don’t use a loan for investing, and that you are paying back your money early if you can – to avoid paying vast amounts of interest.