How to Survive Taking a Personal Loan

Personal Loan Guide

Taking out a loan can be decision with long term ramifications, and demands a borrower’s full attention to the whole process. Loans can be an extremely useful and effective tool when properly managed, but can follow a person indefinitely if the process is mistreated. This how-to guide will explain the steps to go from deciding if a loan is the right decision for you all the way through the loan application process. 

Step 1 – Determine the Risk & Reward of Taking on Debt

A loan is a financial instrument that has more risk variations than rewards. A successful debt venture will allow a person to accomplish their goals with the money they borrow. An unsuccessful debt venture can arise when the borrowed money does not have the intended effect and/or a borrower cannot repay their loan for a wide variety of circumstances.

If a loan is secured with a lien on a property, the lender can take ownership of the borrower’s designated property if they default. If a borrower is delinquent on unsecured loans their credit will suffer, which can have a long lasting impact on their ability to borrow in the future, even including having a credit card. While credit can eventually be repaired over time, some borrowers may have to file for bankruptcy, which will affect their ability to get a loan forever.

When used safely and responsibly, taking out a loan can be a great financial decision, but it is never without risk. It is very important that potential borrowers fully understand the impact of taking on debt.

Step 2 – Create a Realistic Budget for Now and the Future

In order to pay back a loan, a borrower should be confident in their ability to successfully make the necessary monthly payments. The only way to truly know what payment is affordable is by creating a detailed budget outlining all incomes and expenses. It is also important to note that unexpected expenses always arise and a budgeting process should include a cushion for those expenses. Creating a budget is a matter of understanding and determining income and spending over the previous several months and finding a trend.

What is less straightforward is future budgeting. Loans are often repaid over a time frame of several years and it is crucial that a potential borrower factors in spending and income changes into their budgeting. Some major factors to be considered would be an increase in housing costs in terms of rent or property tax increases, general inflation of 2-3% annually (historically), or any perceived income increases. Once these estimates are calculated, a potential borrower can have a good idea of what monthly repayment figure is achievable, and equally important, what figure is not achievable.

Monthly budget

Step 3 – Research Available Options

There are several ways to get financing for loans depending on the intended use. While getting a personal loan from a bank is possible, it is incredibly uncommon. If a person wants to fund a project or research, there are several online crowd funding sites available such as Kickstarter, Gofundme or Indiegogo. For micro loans there are several peer-to-peer lending sites available that specialize in small loans for day-to-day activities and business practices. If you are still reading this, you have no doubt landed on a personal loan as the best vehicle to meet your financing needs. If that is the case, you will want to research individual online alternative lenders.

Step 4 – Get Quotes

Once a potential borrower has a realistic monthly payment included in their budget, the next step is to compare loan quotes. There are many online alternative lenders that offer a variety of loan amounts, repayment terms and rates. Some sites are geared towards people with worse credit and have generally higher rates than other loan providers. Some sites specialize in certain personal loans such as student debt refinancing. Peer-to-peer lenders may have an option to write a loan reason that appeals directly to a potential investor, making funding for a unique purpose more likely.

There are some loan aggregator websites that allow potential borrowers to see multiple loan providers in order to compare terms for loans of certain amounts and/or repayment time frames. Someone searching for financing needs to investigate all potential lending provider options to make sure their needs are being met in the most appropriate way possible.

Loan quote aggregator

Step 5 – Choose a Loan

Choosing a loan is not always as easy as picking the loan with the lowest rate. If a loan with a lower APR is set over more years than a loan with a higher APR, a borrower can end up paying more overall for the same initial loan amount. On the other hand, if the monthly payments are smaller, a borrower can have the flexibility to pay more than the monthly payment to pay down the principle, and effectively lower the total interest payments.

If a borrower wants the least possible payment they can take a loan that is as short as possible, but the monthly payments will be higher, increasing the possibility of delinquency for certain borrowers. Once a potential borrower weighs their risk tolerance along with the certainty of their budgeting, and are convinced take out a loan is the correct choice, they can start the loan application process.

There is always risk involved in taking out a loan. Using money you don’t currently have is called leverage, and can be a very effective tool if used properly and everything goes as planned. With the steps outlined above, a potential borrower can make the right financing decision to help them accomplish their financial goals.

Your loan decision

Now that you understand how to analyze a debt decision, find the best personal loan company to meet your financing needs.

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