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The Do's and Don'ts of a Personal Loan - What to Look For

Personal loans might be easy to access, but poor management will always cost you

Newsweek AMPLIFY - The Do's and Don'ts

In a world of infinite needs, anyone could be overwhelmed by financial obligations that require quick cash to resolve. Debt would be the best alternative, but with so many credit institutions in the market, it isn't easy to get the right lender with suitable terms and conditions.

Fortunately, top-rated firms like Prosper primarily exist to match you with the right lenders with the best rates.

What Is a Personal Loan, and How Can You Qualify for One?

There are many types of loans in the financial world. Personal loans are just the tip of the iceberg though not many people take the time to understand the different types of loans. Before digging into what should be done before taking a personal loan, you must understand the definition of a personal loan and what you need to qualify for one.

A personal loan is money you would borrow from anywhere, be it a lender, a credit institution, or a bank to take care of an immediate financial need.

There are many reasons why people borrow money from these institutions. For example;

● To cover for emergencies

● To pay the bills

● Buy more household items, e.g., cars

● To invest in other business

● To pay credit card debt and other existing loan balances

Anyone can source for a personal loan to fulfill a specific need. Many lenders are willing to loan you some money regardless of your needs. However, not all credit institutions will have the best terms that fit your current situation. It's upon you to seek information about these lenders, learn how they operate, and make informed decisions. But if you don't have enough time or knowledge to do it yourself, you could also seek a trusted intermediary to match you with the perfect lender.

Types of Personal Loans: Discover What Types of Personal Loans Exist and How They Work

Now that you know what a personal loan is, the next step is to discover what lenders and credit institutions offer personal loans.

There are two major types of personal loans: Secured and Unsecured.

  • Secured personal loans are loans awarded upon surrendering an item of value, also called collateral. This is important because if you're unable to pay up, the collateral will be sold to settle the remaining amount. The rule here is that the item must be the same or almost equal value to the amount borrowed.
  • Unsecured personal loans don't ask for any collateral. Instead, the creditor or lending institution will consider other factors to determine how much they will give you. Factors such as your credit score and credit history will be used to calculate how much money you qualify for at a particular time.

Most people are more familiar with unsecured personal loans where the lending institution lends them money according to their creditworthiness. For those having a hard time making the decision, always remember that your choice will be affected by a wide range of factors. For example, the urgency of the matter and what you're willing to give up to get the borrowed amount. In all your transactions, one thing should remain clear; you should focus on getting loans with the best terms and conditions; otherwise, the lender might take advantage of your desperation.

What to Consider When Taking Out a Personal Loan

Taking out a personal loan should be treated the same way as obtaining a long-term loan, e.g., a mortgage or car loan. This is because you will be exposed to many financial risks.

For instance, what if your investment doesn't pay off as anticipated, yet you invested some borrowed money to make it work? You need to be in a capacity to tackle any challenges that may arise along the way.

Below are a few things to consider when taking a personal loan.

Always Focus on Your Needs, Not Wants, or Luxuries

Before taking a personal loan, you should be clear on why you're borrowing in the first place. Some problems don't need borrowing. If you can dig a little deeper into your pockets or emergency fund, it's not the best idea to take a personal loan.

Borrowing without a solid reason is taking an unnecessary risk, which could plunge you into worse financial problems. It is advisable to identify the main reason for borrowing and ensure that there are no other options.

Your Credit History

Having a bad credit score won't give you a chance at the negotiation table with the lender. Most lenders and credit institutions have access to your credit history, and before awarding you any amount, they'll do a background check on your credit history to study your behavior.

If you have a bad credit history, they'll probably award you a small amount or no money at all. It's therefore imperative that you maintain a good credit history to be eligible for substantial amounts in the future.

Always pay your dues on time, pay any existing costs, and keep a good record with your creditors. Don't forget to pay off your credit card balance. This way, your lenders will have no option but to trust you.

The Interest Rates

The interest rate is simply the amount on top of the borrowed money that makes the lender's earning for lending you the money. Always select the lender with the least interest rates to avoid being extorted especially if it is your time borrowing from the lending institutions.

Some lenders and credit institutions have incredibly high-interest rates that scare off most people. Choosing the least personal loan interest rates today will ensure that you have an easier time paying back the amount owed. Also, remember to compare the financial institutions you intend to borrow from and choose the one with the least interest rates.

Added Costs

In this case, additional costs refer to any further amounts that could increase your overall balance, for instance, processing fees, withdrawal fees, prepayments, and penalties for late payments.

These additional payments may sound minor, but in a real sense, they're not. Always consider these little payments because if they're added up, they could increase your total financial burden.

The Don'ts of Borrowing Personal Loans

Sometimes when we are desperate to overcome financial difficulties, the urgency clouds our minds to a point that we ignore or overlook some basics of borrowing money.

Below are thoughtful pointers when borrowing money for whatever reason.

Satisfy pressing needs and not luxuries

Don't use borrowed money to satisfy wants and luxuries. Instead, use it for your needs.

Using borrowed money for anything other than the intended reason is considered an unnecessary risk. Always use the money to satisfy your needs. If it helps, have a budget in place to help you remember why you borrowed it in the first place. This will keep you from misusing it on irrelevant items. Temptations are everywhere, so having a budget could help you refrain from misusing borrowed money.

Don't borrow more than you need

Money is tempting to have, whether it's earned or borrowed. Some people get tempted to borrow more than they need, only to end up wasting some. This is also an unnecessary risk, which could plunge you into a bigger financial crisis. Avoid borrowing more money than you need.

Before taking a personal loan, always put your needs first. Consider what you need at the moment and borrow what's enough for that particular need. You could also set your loan limits to ensure you don't apply for too much.

Familiarize yourself with the lending terms and conditions

Every lender or credit institution has its policies and terms that need to be agreed upon before signing up for a loan. Unfortunately, not many people take the time to read and understand these terms and conditions.

Most people skip the jargon and technical stuff to hasten the process. Reading the terms and conditions helps you know important details such as how the debt will be paid, the payment frequencies, and the penalty implications if you default the payment.

Avoid late payments as much as possible

Most lenders will be quick to deposit money into your account whenever you sign up for a personal loan. It's only fair to pay them back as quickly as possible. Making late payments could have negative implications on your credit score. Some are even tempted to withhold the money intentionally, thinking that they may get away with it. Making early payments will build trust with your lender, and they will trust you with bigger amounts.

Don't shift from lender to lender

Shifting from lender to lender is highly discouraged because of one reason. There are no pre-existing relationships with new creditors/lenders. They have no information on your credit history, your banking habits, your account balance- simply put, they have no idea who you are. With this kind of relationship, there can be no trust. Always stick to one or a few creditors who you have established a relationship with.

Prosper with the best personal loan services

If you're having a hard time figuring out where to get the best lender that matches your situation, now is the right time to seek the advice of professional personal loan expertise that Prosper can provide.

Need better financing with low, fixed rates? Get in touch with Prosper, check your rate, and receive instant loans with a simple click.

The contents of this article is for informational purposes only and does not constitute financial or investment advice. It's important to perform your own research and consider seeking advice from an independent financial professional before making any investment decisions.

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