Unsecured loans are easy to come by. But before you sign, make sure you know what you’re getting into. There are benefits and drawbacks to getting a personal loan instead of using a credit card or tapping into your home’s equity. A Few Pointers on Private Loans:
Pay attention to APRs, not just interest rates.
Before taking out a loan, it’s a good idea to check out the interest rate and APR. The interest rate only accounts for the cost of borrowing money, while the APR also factors in any associated fees. Average annual percentage rates (APRs) on loans are higher than interest rates. There are credit cards that charge a 25% premium over the annual percentage rate. Don’t take out a loan if you’re not sure you can pay it back without going into debt again or going over your monthly budget.
Ensure Extra Cash Flow
When you have a comfortable emergency fund, you can handle both regular and unexpected expenses with ease. Put aside enough money to pay for your housing, food, utilities, transportation, and clothing expenses. Aside from that, you should always be saving at least $1,000 per month for emergencies. Learn the terms of your loan. Do not sign any loan paperwork until you have carefully read it. Learn the terms of the loan, including the interest rate. In order to avoid any unpleasant repayment surprises, monthly payments should be detailed. Unexpected costs can severely damage a loan, and late payment or prepayment penalties are two prime examples.
Avoid fees by paying off your loan early.
Prepayment of your loan allows you to avoid incurring fees like these. Variable-interest loans have an annual percentage rate (APR) that is lower than the interest rate, so paying off the loan early can result in a savings. Asking about prepayment penalties at the outset of a loan’s acquisition can help borrowers avoid unpleasant surprises when the time comes to pay back the borrowed funds.
Only Borrow What You Need
You should never borrow more than you need. When deciding how much to borrow, consider how much you can afford to pay back without putting yourself in a bind.
If possible, don’t borrow for things that can wait. If you’re thinking of buying a car or furniture, consider waiting until you have saved up the money to buy it outright—then avoid paying interest on top of what would be paid for the item itself!
Remember: Don’t borrow things that are not necessary items (like going out for drinks every weekend). It’s better to put this money into savings instead.
Personal loans can be a great way to make large purchases or pay off higher-interest debt, but they come with some risks.
Make sure you read the fine print in your loan documents and consider prepaying if possible so that you don’t get hit with any surprises along the way.