If you’re looking for a way to manage debt, a personal loan may be the answer.
The financial boost is useful for debt consolidation, paying off big-ticket items like school fees, business expenses, home improvements or a car. However, if you don’t choose the right lender and loan, you could be forking out more than it’s worth.
Since last year, rounds of stimulus packages have provided some relief. Although these government-issued payments have been helpful, they haven’t stretched far enough for many. Personal loans fill the gap. Still, with lenders tightening requirements and incomes less steady, there are new questions to ask and factors to consider for finding a personal loan suitable for your needs.
The below tips will get you started.
1. Weigh Up the Best Features
Features like low-interest rates and flexible repayments sound good, but are they right for you?
Consider which are most important based on your financial goals. Some lenders allow you to defer or move your next payment date if income is sporadic or you’re experiencing hardship. Or if debt consolidation is essential, choose a lender who sends payments directly to your creditors.
Other features to weigh up are:
- Extra repayments (additional and lump sum)
- Borrowing power
- Redraw availability
- Ongoing fees and charges
- Customer service
- Short loan terms
2. Apply for the Right Amount
Personal loans are there to help you out in the short term. Don’t let it leave you with long-term debt because you’ve bitten off more than you can chew.
The right amount should be based on what you need the personal loan for and how much extra you’ll pay in interest, fees or charges. Make sure the end figure is realistic, so you can comfortably make repayments. Use an online borrowing calculator to work out your repayments and interest rate. Remember, applying for a higher personal loan than you need could be the difference between being declined and being accepted.
If you want to reduce the impact of loan repayments on your current cash flow, consider reducing the amount or extending the loan term.
3. Avoid Personal Loan Traps
Aim for a smooth application process by staying away from personal loan traps. These mistakes could end up costing you more:
- Not reading the fine print before signing
- Failing to research loan restrictions
- Taking out a personal loan for something you can save for
- Not comparing lenders and loan types
- Forgetting to check your credit score
- Applying for multiple loans at once
- Not checking early repayment penalties
- Failing to understand the pros and cons of the loan term
- Overlooking the purpose of your personal loan
- Forgetting to evaluate the lender’s customer service options
- Using payday or fast cash loans, which usually have hefty upfront fees
- Not understanding how personal loans work
4. Look Beyond the Big Banks
Banks aren’t your only lender options.
Hunt around for alternatives which could be more practical for your needs. By looking beyond the big banks to smaller online lenders, you’ll have access to more competitive rates.
Nonprofit credit unions are also another option. Their rates and fees are likely to beat what major banks typically offer.
5. Get Your Finances in Good Shape
How healthy do your finances look?
Know where you stand by checking your credit score and accounts early. Before taking out any loan, you’ll need to show a good savings record and maintain your accounts and credit score. Missed or late payments, arrears and debt collection may impact your credit rating.
If your accounts look like they’ve seen better days, build a better score by:
- Paying off debts
- Setting reminds to pay bills on time
- Bringing any delinquent accounts current
- Finding a lender that works with you to help rebuild your credit
- Knowing what banks and other lenders look for when reviewing an application
Shopping for a personal loan involves more than a couple of steps. But finding a loan that lowers your monthly payments and simplifies your finances will pay off in the long run.
Do you have any tips to add to this list about how to choose the right personal loan for you? Tell us in the comments below.