Personal Loans 101: What You Should Know Before You Borrow
Unless you have experienced a major windfall, chances are that at some point in your life, you will need to borrow money from a lender. Before borrowing money, it is important to understand the logistics behind borrowing. By informing yourself before you take out that personal loan, you will increase the likelihood that you will be able to pay it back in a timely manner.
Before you even think about taking out a personal loan, you should first assess the situation. Do you really need the loan you are taking out? Are there other ways you can finance your project? How much money do you absolutely have to borrow? What will the money be used for? What can you afford as far as payments go each month – if you cannot afford the payment, do not take out the loan – by making an inventory before you go loan hunting, you can be a smarter shopper.
There are different methods of borrowing money:
- Credit Cards – A credit card is a type of personal loan. If you know you can pay back the borrowed amount, in full, at the end of the month, you may just need a credit card. Be aware that interest rates on personal loans can be quite high. Thus, carrying a balance on a credit card can lead to quite a bit of financial distress.
- Student Loans – A student loan is intended for education. When taking out a student loan, it is important that you only borrow what you need. The interest rates for student loans are often quite low, but the amounts borrowed tend to add up quickly over time.
- Mortgages – A mortgage is money taken out for the purchase of property. Failure to pay a mortgage often results in confiscation of the property by the bank.
- Business Loans – these are loans taken out by individuals to start or expand with the purpose of earning money with the items bought or rented
- Personal Loans – a personal loan is taken out for a myriad of reasons. Most commonly, personal loans are obtained for big ticket purchases like cars, for consolidating debt, or for medical expenses. A personal loan should never be taken out if you just want extra spending money.
Once you’ve decided what sort of personal loan is best for your needs and how much you’ll need to borrow, here are some concepts you’ll want to familiarize yourself with before you go loan-hunting.
- Interest Rates – You will want to shop around for the best interest rate you can get. The interest rate on a loan is the fee the bank charges, monthly, for you to take out the loan. For example, on a $100 loan, if there is an interest rate of 10%, you’ll pay $10 in interest. Interest adds up quickly, so be aware of what the interest rate is for the loan you will take out.
- Credit History – Ideally, you will have a good credit history. A good credit history means a lower interest rate. A poor credit history means you may not be able to get the loan. Work hard to protect your credit.
- Monthly Fees – In addition to interest, some banks charge monthly fees on your personal loans. When calculating the total amount you will need to pay back on the loan, don’t forget to add in this amount.
- Early Exit and Establishment Fees – Some loan companies ask for fees to initiate loans and some loan companies charge you extra should you pay off your loan early. Depending upon your interest rate this could be a good deal or it could be a rotten deal. Make sure to ask plenty of questions to your loan officer before signing on the dotted line.
- Consumer Code of Credit – Whenever you take out a loan in Australia, your transaction is covered by the Australia code of credit. The Australian Consumer Code of Credit protects you against false lenders and unfair treatment from lenders.
Don’t just sign up for the first loan you come across. It is best if you do your homework when it comes to your personal loans. Compare at least three choices before deciding on which loan will work best for you. Remember, you should not take out a loan unless it’s an absolute necessity – this will save you money in the long run.
Related posts:
- The Quick Lowdown on Personal Loans
- Loans for People with Bad Credit: Know the Fundamentals
- Personal Responsibilities and Personal Loans: How to be a Good Borrower
- 10 Things to Know about Bad Credit Personal Loans
- A Brief Personal Loan Guide: 8 Quick Tips
This article is opinion only and should not be taken as financial advice.
Filed Under: Bad Credit
