There are a lot of situations in life where getting a personal loan is the right thing to do. This, nonetheless, depends on your current situation and judgment, which are both unique and subjective. Still, there are some universal factors that everyone should consider when getting a personal loan. Even people who would describe themselves as the least materialistic can’t deny that one’s finances affect a huge portion of their lifestyle. Others would even argue that they determine it. So, in order to ensure that this gives you the biggest effect, you need to hear out several vital tips. Here are six of them.
Getting a financial loan is a commitment. Now, based on the amount of money that you’re borrowing it doesn’t have to be a particularly big commitment but still… you need to at least consider alternatives. So, if your income is the problem, you might want to consider the idea of getting yourself a part-time job. Finding additional employment online is a great way to boost your household budget without having to sacrifice your day job. This is due to the fact that these online jobs usually have flexible work hours.
Another way to boost your income is to lead a more austere life. Sure, no one is expecting you to lead the life of a hermit, however, you need to bear in mind that you will have to reign in your spending habits quite a bit. Start by considering which of the small luxuries you could afford to deny yourself without seriously disrupting your lifestyle quality. From this point, you can start drafting a plan. Just make sure not to go too hard on yourself, seeing as how this is the fastest way for you to lose motivation and abandon the plan in its entirety.
The next thing you need to consider is selling an asset. If the home that you live in is too big for you and your family or if you’re driving a car that’s far more luxurious than you can afford, it might be better to swap for something more modest. This way, you’ll downgrade but also get an excess of cash that you can repurpose in order to improve your budget. The biggest problem with this idea lies in the fact that selling an asset to fix a temporary problem may be a bit too excessive. In that case, going for a loan might be a better idea.
2. Consider your options
When it comes to getting a loan, it’s vital that you know all your options. First of all, you have two major types of loans – secured and unsecured. Secured loans are the ones where you have to offer reassurance to the lender in the form of collateral. Collateral is an asset (like a home or a mortgage) that your lender can use to reimburse themselves, should you fail to meet your financial obligations. Due to the fact that secured loans are safer for the lender, you might be able to get more favorable terms than you otherwise would.
The second type of loan that you need to consider is unsecured loans. This type doesn’t require collateral. Instead, they look at your credit score (a metric that we’ll discuss in-depth, later on). Based on this credit score, you’ll get your terms. Needless to say, this method is by far the most common and popular when it comes to small personal loans. When it comes to online platforms, the majority of them merely want to know how much money you need, what is your credit score and how long of a loan term you want.
In a scenario where you are unsure of exactly how much money you’ll need in order to get back on track, you need to consider getting a line of credit, instead of a traditional loan. This method is quite simple and ingenious. You get approved of a loan in a certain amount but you don’t get to pay back the entirety of the sum. Instead, you get to pay back only the amount that you withdraw from this account. Needless to say, this method provides you with a certain amount of flexibility but it may also be a great temptation.
3. Credit score
Previously, we’ve mentioned the concept of a credit score, which is a metric used to determine your financial trustworthiness. The most commonly used is the FICO credit score, which is a three-digit number ranging between 300 and 850. The higher the score, the better. For instance, a score between 300 and 579 is very poor, the score between 580 and 669 is fair, the score between 670 and 739 is good and the score between 740 and 799 is very good. Everything above 800 is considered to be an excellent credit score.
As far as calculating credit score goes (so that you know what to expect), there are five factors that determine what score you’ll get awarded. First, you have the payment history (how vigilant you are and whether you’ve always paid on time), which is the most relevant contributing factor with 35 percent of the entire score. Then, you have the amount of money owed (another 30 percent). After this, you have three smaller factors like the length of your credit history (which is why canceling credit cards that you no longer use is a bad idea), the new credit applied for recently and the types of credit used.
Keep in mind that when applying for an unsecured personal loan, it’s often a good idea to try and improve your credit score. There are several methods that you can do here and the choice is yours. First, you can try with loan consolidation. This way, the amount of money owed remains but you get one credit instead of several (types of loan reduction) and you get a single monthly credit payment to focus on. This makes it harder to miss, which automatically makes you into a more vigilant debtor.
4. Making a plan
The next thing you need is a plan on how you are going to pay off the loan in question. You should start this with the question of – how much loan can you afford? The question may sound a bit confusing, however, you need to bear in mind that the size of the loan and the length of the term will determine the size of your monthly credit payment. You should also remember that you have other expenses, as well, to worry about. You should add your monthly credit payment to your already existent expenses and see if your income is big enough to cover them. It is really that simple.
Once you have the monthly credit payment in mind, you need to come up with a monthly payment calendar. When does your monthly salary (or another type of income) arrive? When are your credit payments due? What about your other financial obligations? As you can already tell, the way you behave here will not only affect your current financial state but also your credit score. This might come back to haunt (or reward) you in the future, seeing as how your credit score affects more than just your chance to get a loan. Even your insurance premiums and a chance to get a job in the financial sector may depend on it, so you need to take it very seriously.
5. Money-saving tips
Seeing as how paying off the loan will put you under an additional financial strain, you might want to consider learning how to properly save money. First of all, you need to set up your own emergency fund. According to some estimates, this fund should contain at least three months of your living expenses. So, if your monthly expenses amount to $3,000, you should go for, at least, $9,000 in the emergency fund. Some, on the other hand, go for an as high figure as nine months. The more you have there, the safer you get. This should keep you safe in the case of a loss of employment, a medical emergency or any other such unexpected occurrence.
Another thing you need to do is figure out a way to gamify savings. There is a number of methods that you can use in order to make these things more interesting. For instance, you could introduce no-spending days. During these days, you aren’t allowed to spend a single dollar, which is easy to achieve if you buy all the necessities the day before. You could also go with something a tad more game-like, like a 52 weeks saving plan. This is a simple method where you increase the amount of money you put away by $1 every week. The amount of money that you will be able to save depends on your initial deposit. For instance, if you start with $1.00, by the end of the year, you will save as much as $1,378.00.
The most important thing here, nonetheless, is your ability to tell the difference between want and need. Keep in mind that unless you learn how to prioritize, no strategy will help. Sure, you can deny yourself various luxuries but for as long as you see this as a sacrifice, rather than the right way to go, it’s only a matter of days before you regress to your old habits. Keep in mind that what you’re trying to do is adopt new financial habits, not fix a temporary issue and be back on square one in a matter of months.
6. The issue of motivation
The last thing you need to do is consider the issue of motivation. Why do you need this loan? Are you in financial trouble that you want to get yourself out of? If so, what are the odds of making the mistakes that have led you here in the future? Do you want to start your own business? The majority of startups are funded from personal means and applying for a personal loan is just one of the methods to get there. In other words, you need to understand why you are doing what you’re doing at the moment.
What this means is that you need to draw a vision board and see the big picture. Set your own financial goals and see where it leads you. Keep in mind that these goals need to be meaningful to you. Do you want to start your own business and become your own boss? Do you want to buy your own home or finance your own wedding? Do you plan to start a family and all that comes with it? As you can see, all of these reasons are both personal and financial. Needless to say, this may be just what you need in order to get enough intrinsic motivation to pull it through.
Lastly, you need to avoid pushing yourself too hard. Spending every single night reviewing your bills and financial projections are definitely not good for your mental health. In fact, getting obsessed with saving is never a good thing. For a lot of people, both lifestyle and habits deal in absolutes (all or nothing), which makes it into a slippery slope. Sure, you need to lead a more austere lifestyle, however, this doesn’t mean denying yourself every pleasure in life. Make sure to treat yourself from time to time, just so that you have the motivation to endure the long run. Leading your finances efficiently is not a race but a marathon.
As you can see from the above-listed, deciding to get a personal loan might be a bigger step than you initially expected. Nonetheless, this doesn’t have to make it intimidating or make you reluctant to consider it as a method. With the right mindset, this can become a huge opportunity and help set you on the right track both financially and lifestyle-wise. All in all, when used right, this is a method that can help create new options and resolve all problems for both you and your family.