There are times when you need to get extra cash, even though you’re making a decent amount of money. Your account for every necessity in your life, and there are times when emergencies spring up and you’re left reeling under the burden of bills and expenses. One of the most unfortunate facts of life that you must come to terms with is that your expenses are going to be greater than your cash flow. The best situation for you would be to open a savings account and save up money for a rainy day or an emergency.
However, for most people that isn’t a viable solution, and they are left to take out personal loans to get financial respite. The most important thing for you to understand is that there are different types of loans available and that means you must pay attention to the different factors influencing them. To give you better insight into the world of personal loans, Bonsai Finance is going to share some of the essential dos and don’ts you must follow when you’re taking out a personal loan.
The Dos of Taking a Personal Loan
You can go about several different paths when it comes to taking out a personal loan. To ensure that you’re on the right path, here is everything you must do:
Track Your Credit Score
You must track your credit score every step of the way since this will allow you to acquire loans from reputable lenders. It’s not a secret that the better your credit score is, the greater your chances will be of getting approval from highly regulated lenders, and you’ll also get the advantage of procuring better interest rates for your loans.
Keep an Eye on Prepayment Penalties
You should find out whether your loan comes with any prepayment penalties to give yourself some breathing space. If you’re able to repay all your loans before time, it will work to your advantage. However, you must ensure that it isn’t going to cost you any money if you pay the loan amount early. The surprising thing is that a lot of people don’t pay attention to this and end up incurring the penalty. To do this you must look at the total repayable amount, and don’t focus solely on the APR.
It’s understandable that you must also keep an eye on any additional penalties that may be imposed if you’re late in making any payments. These little details shouldn’t be ignored, because they can easily spiral into long-term issues that will cripple your finances. You must have a good idea about the ramifications for you if you can’t pay the loan back or pay it on time.
Think About Co-Signers
One of the best ways to qualify for a loan quickly is to have someone that has a better credit score co-sign with you on the loan. Even though it allows you to get a loan easily, you should keep this option as a last resort, since if you can’t pay the loan back or experience any hiccups, you can ruin the financial security of someone else.
Avoid Payday Loans
Payday loans have been incredibly popular and have exploded over the past couple of years. However, it’s not a good idea to try and get payday loans, since the average payday loan may have interest rates that are more than 300% and make it difficult to pay back. Most lenders that have been offering payday loans have been labeled as illegal in a lot of different states.
Try to Find Better Interest Rates
The interest rates you’ll be paying on your personal loan are going to make a massive difference. You should know how compound interest works, since the higher your interest rate is, the longer it’ll take for you pay off the debt, which will cost you more money. Even though loans are helpful, you must know that they don’t offer long-term solutions. Therefore, you must still try to save for your future, and only think about loans when it’s your last resort.
The Don’ts of Taking a Personal Loan
Now that you know about what you must do when applying for personal loans, we are going to discuss some of the things that you must avoid at all costs when taking a personal loan.
Don’t Borrow from Family or Friends
Financial problems between family and friends can turn your life upside down, which is why you shouldn’t think about borrowing money from them. You may think that you’ll manage to pay back the loans, but problems and obstacles can arise at any time. It’s better to avoid the embarrassment and trouble by not involving your friends and family in your personal financial matters.
Don’t Borrow from Shadow Banking Lenders
You’ll face major problems if you’re borrowing from unofficial lenders, since they don’t need to follow the same rules, followed by officially sanctioned lenders, like banks. When applying for loans you should give importance to accountability and regulation. However, shadow bank lending is usually driven by dishonest lenders who can increase the rates whenever they want.
Don’t Accept to Pay Big Original Fees or a Viable Interest Rate
Personal loans, in general, come with fixed interests, and if you want to avoid being surprised in the future, you should ensure that your loan has a fixed rate. Some lenders use shady tactics, where they will attach an origination fee to the loan and add it into the payments. To avoid getting into this trap, you must carefully read the fine print and only work with regulated vendors.
Don’t Only Work with Your Personal Bank
Most banks provide their customers with easy loans, but you shouldn’t assume that they offer the best rates. Getting a loan from your personal bank is convenient, but it can also be expensive in the long run. The best advice is to do your research and compare personal loans offered by different lenders and banks to get the best option.
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