While personal loans are extremely convenient and can be very effective when used properly to get out of a tough financial situation, it is important that the decision to take the loan be taken with a lot of attention because there can be many long-term ramifications, including an impact on the borrower’s credit score. Some important steps that need to be taken for a proper evaluation of the loan process:
Finding Out the Pros and Cons of the Debt
When a loan is taken out for the proper reasons, it can lead to the borrower being able to accomplish his financial goals, however if for any reason, the borrower is not able to fulfill the intended objective with the loan, the situation can become grave as usually the original bothersome financial situation continues to exist and the new debt also needs to be repaid. If the borrower is not able to pay back the loan that has been secured with collateral like a designated property, the lender can initiate a move to take possession of the property.
In case, the loan is unsecured, and the borrower cannot pay it back, the account may be handed over to a collection agency and the credit score of the borrower will also take a beating. This will mean that in the future the borrower will find it difficult to take on a loan in the future or that he will not qualify for the really low-interest rates.
The credit score can be improved over a period of time by exercising financial discipline, however, if the situation becomes really bad and the borrower files for bankruptcy then the credit score can be affected for a very long time.
Create a Budget That Is Practical
The amount that can be paid back every month without unnecessary stress can only be ascertained by making a budget that outlines the income stream and sets off the expenses to find out what the surplus is. It is vital that the budget allows for unexpected expenses, otherwise, a medical emergency or even a car breaking down and needing repairs can create a crisis.
Since the loan may entail a repayment schedule stretching over a number of years, it is equally important to make a projection of future income and expenses so that the borrower can make sure that he would be able to pay the loan back even after allowing for increased cost of living and other planned expenses.
Investigate the Loan Options
There are quite a few ways in which a person can get access to personal loans. A secured personal loan may be obtained to purchase a car or any other asset like office equipment or household durables, however, the risk is that in case the payment is not made as per schedule, the asset may be repossessed by the lender.
Unsecured loans are available from banks, credit unions, and private agencies. There are also a number of platforms that offer online personal unsecured loans; these are very convenient to compare the interest rates as you can do it at your own convenience from the comfort of your home. If the borrower wants to fund the manufacturing of an innovative product, he can also turn to crowdfunding platforms that can give him access to an interested audience.
Business loans can also be obtained from a number of peer-to-peer sites that specialize in giving micro loans to small and medium businesses.
Getting Quotes and Choosing the Loan
Today with the advent of a number of internet sites, getting quotes has become quite easy and you can log onto various online services that will give a comparative analysis of the loan terms of various lenders, including rates and repayment terms – the rates will vary based on your credit score. You can even look at sites that perform debt aggregation if you are looking to consolidating your debt and paying it off with a debt consolidation loan.
Choosing a loan requires you to be clued up on interest rates and the effect of loan tenors. It is not necessary that the lowest APR is the cheapest option because if the loan tenor stretches out for long, the total interest expense can be far more than that of a higher-APR loan. The borrower should aim to get a loan that he can pay back in the shortest possible time.
Conclusion
In order to take the correct decision, the borrower needs to essentially understand the pros and cons of personal loans, find out his disposable surplus, find a loan that is suitable, and opt for a tenor that is as short as possible keeping in mind how much he can devote to paying the loan back every month to keep the total interest outgo small.