1. Do not take a personal loan before a major one (2-3 months prior)
If you are about to purchase a high-expense product such as a car or a house, it would be best not to, as the more loans that you take, further diminishes the personal loan amount that you would qualify for. When you apply for a bank loan, your (Debt Servicing Ratio) plays an integral role. As it calculates the percentage of your allocated income, it gauges how much of it can go towards repaying your loan.
Example, having a 20% DSR would mean that your loan repayment can’t exceed 20% of your salary. The more personal loans that you have accumulated, the smaller your car or housing loan will be as the DSR ratio would have skyrocketed beyond control. Rack them up like Tetris blocks, and you could end up with nothing. If you do need a personal loan before a major loan, do get a mortgage specialist to assist you as their advice and suggestions could go a long way in making a more rational decision.
2. Streamlining your loan is key
Be as specific as possible to ensure that overspending doesn’t happen. Taking a personal loan for your house renovation when one exists for such purposes just isn’t very smart. The same goes for taking a personal loan to pay for your college when an education loan package exists. As specific loans have less interest rates (some as low as 2%), it is good to research and find out your available options before making the plunge.
3. Compare and do some research
If your friend tells you that he got the best loan from Bank Z a year ago, don’t blindly follow him. Proper research and consideration is needed. Find a bank that offers the lowest interest rate. As such banks may be low on clients, and hardly anyone may be borrowing from them, lower rates, less stringent payment terms and freebies are usually given out to entice you. Even a percentage difference of 1% can go a long way in ensuring that you save and minimize your total payments to the lowest amount possible.
4. Find out about the penalty for late payments
Even though many pay their loans on time, it is still recommended to find out about such penalties. Like credit cards which may potentially snowball into an avalanche of ever increasing rates with accumulating late payments, it’s essential that you ask your bank about it. This is useful when you may have two possible choices, i.e. banks that offer the same interest rates, to make your decision.
5. Personal Loans are not to be used as Leverage
A majority of loans are unsecured, as there is no guarantee behind them. To compensate, banks jack up their interest rates as a security measure. If you have no clue on how the payment procedures work (its due date and method of payment) it would be advisable not to take the loan. The interest rate may get so overwhelming, potentially driving you to the brink of bankruptcy. Personal loans should only be used to help with cash flow problems and not be used for quick gains. Don’t use them for purchasing high risk entities or stock market but instead always seek advice from a professional before making a decision.