Personal loans have gotten more flexible over the years. You can borrow more money by taking out a personal loan. You also have more flexibility when it comes to the terms of the loan; it is even possible to negotiate a loan agreement that suits you best. On top of all that, you have more personal loans to choose from.
Still, personal loans are only valuable to your personal financial state when you use them properly. There are a few things to consider when choosing a personal loan to take out, including the cost of the loan and its payment term. To help you make the most out of your next personal loan, here are the tips you can’t afford to miss.
Shopping around for deals and loan offers is a must. It is no longer a hassle now that you have web aggregation tools and other resources helping you get quotes from multiple lenders. There are even apps that will match your credit history with the most suitable personal loan to take out.
It takes no more than five minutes to find the best personal loan deals on the market. After filling out a simple search form, you can start comparing the personal loans you have access to and settle for nothing but the best one according to your specific needs and requirements.
Set the Principal Amount
The best way to go is borrowing only the amount of money you need. I know how tempting it is to borrow more just because you can, but you will end up paying more on interest and other charges when you do. Sticking with the bare minimum is how to get the most value out of the loan.
Borrowing more than what you really need also puts more pressure on your personal finance. When you do run into issues repaying the loan, it will also hurt your credit history badly. Why take the extra risk when you can have the money you need within a couple of hours?
Review Your Credit History
Speaking of credit history, it is also a good idea to do a quick review of your latest credit score and history before applying for a personal loan. Many mistakenly believe that credit history is only taken into account when applying for larger loans such as a mortgage. That is not the case.
Lenders will still review your credit history when reviewing your personal loan application. The cost of using the loan is determined by the state of your credit. If you have inaccuracies in your credit history, take steps to correct them before applying for the personal loan to get the best deal.
Check the Interest
There are two things you want to understand about the interest on your personal loan: the rate and the way it is calculated. Interest rate is fairly straightforward. You get a percentage added on top of the principal amount as the cost of using the loan.
The way interest rate is calculated, on the other hand, is often neglected. Even with the same interest rate, a personal loan with daily-compounded interest will still cost more than one with an annually-compounded interest rate.
Beware of Origination Fee…
Some lenders charge an upfront fee for providing you with the loan. A 1% fee on a £10,000 loan means you only receive £9,900 when the loan is cleared. There are different names for this fee, but it is basically origination fee.
This fee actually affects how valuable the loan is. A fee of 5% may seem small but having that 5% deducted from the loan upfront is actually costly in the long run. You still pay interest on the full principal amount, which means the total cost of the loan is much higher than you realize.
Fortunately, many lenders now offer 0% origination fee as a way to make their personal loans more valuable. At the very least, you want a personal loan with the smallest origination fee possible in order to benefit more from the financing options.
…and Prepayment Penalty
Another fee to check before applying for a personal loan is prepayment fee. As the name suggests, prepayment fee is a fee that you pay for settling the loan early. This is a fee you want to avoid as much as possible, since it makes repaying the loan early – and saving on interest – more difficult.
You can also go a step further and ask questions about how interest and other fees are calculated when you do decide to settle the loan early. Having the flexibility of prepayment is a huge benefit, since you can allocate unexpected income and bonuses towards clearing the loan faster.
These are some of the tips you don’t want to miss if you want to benefit more from using personal loans. There are still so many things you can do to save on your next loan, so stay tuned for more articles!