The Smart Shopper's Personal Loan Guide

While overall consumer debt has risen during the last five years, the value of personal loans outstanding has remained more or less constant. The amount of personal loan debt trails that of mortgages, student loans, car loans, and credit card balances, but if used correctly, a personal loan can also be a useful financial tool.

This personal loan guide will provide you with some tips that will not only help you get a personal loan, but will help you get a personal loan you can live with comfortably.

The Smart Shopper's Personal Loan Guide

Here are some tips for obtaining a loan with manageable costs:

  1. Do your research online. Even in this day and age, people tend to turn first to their current bank when they start looking for a loan. That is so limiting that it is unlikely to result in your getting the best deal available. Loan shopping online can broaden the field of option considerably. By all means give your bank a shot, but only if they can compete with the field of other options out there.
  2. Compare before you apply. Applying for credit can affect your credit rating, so before you start giving lenders your personal financial information, do some general comparison shopping to narrow down the field.
  3. Ask for rates in your credit score range. Once you've identified which lenders seem to have the most competitive terms, start getting some specifics on what they offer for someone with a credit score similar to yours. Unless you have excellent credit, you may not qualify for the very best rates a lender is advertising.
  4. Factor in your job situation. Your job situation has an important bearing on your success in getting a personal loan. If you are thinking of getting a loan, don't change jobs shortly before you apply because lenders want to see stability. Also, the steadiness and level of your income are even more relevant to your ability to repay than your past credit history. This is not just a question of what it takes to get approved for a loan – if you have any doubts about your job security, perhaps this is the wrong time to be taking on a personal loan.
  5. Base the length of the loan on your budget, not on what the lender is selling. Do some careful budgeting – figure out the costs you need to finance, and factor in how much of your monthly income can go towards the loan payment. Use this to determine the size and length of your loan. Lenders make more money selling larger and longer loans, but you should not borrow more money or for more time than you need.
  6. Recognize that the lowest monthly payments do not always make for the cheapest loan. Longer loans seem to make your monthly payments more affordable, but these are more expensive in the long run because they often carry higher interest rates and they entail paying interest for a longer time. Also, interest rates and monthly payments are not the only cost factors – origination fees and other closing costs are also significant. A loan calculator can help you factor in both upfront and ongoing costs to see which loan is the cheapest overall.

Smart Borrowing and Smart Repayment Go Hand in Hand

The ultimate goal of any borrowing strategy should not simply be to get a loan, but to successfully repay that loan. This is why careful budgeting and working to minimize the cost of the loan before you borrow is so important. After you've obtained the loan, it is vital that you remain diligent about making your payments in full and on time. Any slip-up could significantly increase the cost of the loan via late penalties. Plus, such mistakes could also increase the cost of any future borrowing by damaging your credit rating.

Speaking of future borrowing, even though personal loans and other forms of credit may remain available to you after you repay your personal loan, keep in mind that the idea is to eliminate debt over time, not to keep rolling it over. Between the cost of debt and the role it plays in facilitating spending, borrowing can seriously impede your ability to accumulate wealth.

This is why no personal loan guide would be complete without a reminder that personal loans should be looked at as a bridge to fill in the occasional gap in your finances – those bridges may be necessary from time to time on your road to financial success, but most of that road should be on solid ground rather than constantly relying on bridges.

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