In order to achieve your debt management goal, it is important to consider the basic rules to adhere to when obtaining a personal loan.
Can I Pay for the Personal Loan with Cash?
When you incur a new debt one of the first things you need to keep in mind is the fact that you eventually need to repay it. Consider your income and the amount of money you need to cover your monthly expenses. Check if there is any additional monthly debt. If there is none, it may be useful to look for another loan alternatives-such as a home equity loan, or debt consolidation loan. These options can help you accelerate the reduction of your inefficient debts, reduce your total interest payments and at the same time, give you enough money to boost your income.
For example, home equity loans can increase the equity you have in your home. If you intend to borrow later for investment purposes, you can use the equity to secure your loan. Debt consolidation loans can also reduce the overall debts plus interest and fees. If you roll all your credit card debts, personal loans and other existing debts into one, you will have more control over your financial obligations. You can also save money on the process, and you can enjoy the convenience of paying only one lender each month, instead of multiple lenders at various payment dates.
Should I Recycle my Debt?
Debt recycling is replacing inefficient debt with a debt that can efficiently boost your income and reduce overall debts. Unlike debt consolidation, it is focused more on wealth accumulation than debt repayment. Take a careful analysis of your financial situation. Do you want to accumulate wealth over the long-term by using surplus cashflow to lower your inefficient debts? If so, it may be time to replace your debts with efficient debt such as an investment loan or business loan.
You can put your money in your investment portfolio and take advantage of its tax-deductible interests. While personal loans are not tax-deductible, the interest expenses on business loans have tax benefits. But, be careful when managing your money. It is true that you can use the money to create wealth by engaging into business, adding capital to an existing endeavour or putting money into investment funds—but you must be prepared for the risks. Eventually, you need to repay the loan and if you fail to do so, you may have to pay higher interests in the process.
Is it economical?
While a personal loan can play an important role in helping you meet your short-term and long-term needs, it must be managed and structured effectively to minimize the overall cost of the loan. For example, you may have to pay a higher interest for a personal loan payable within a year, than one payable within 3 months. Compare interests with other lenders, offering similar loan products and check which one can give you the best rates. Include the overall cost of the loan, not just the APR in calculating its cost.
Ask about the possibility of increasing the size of regular loan repayments on a regular basis. This will reduce the interest charged and the principal on the loan. But, you may have to pay for the early repayment penalty. so, it is important to inquire about this matter before you sign up for the loan.
Understand the cost of debt
The lowest interest you will pay on a loan is probably 30% considering the time it takes you to pay the loan especially when you have bad credit and unstable cash flow. Even home loans are not cheaper either, more so considering the other charges associated with the loan. Worst, when you default on payment and interests accumulate overtime. It is also clear that the more you miss payments, the longer the time it takes you to repay the loan and the more the interest and other fees you pay.
It is therefore in your best interest to look for a personal loan that offers the lowest possible minimum repayment rate and charges for you. But, if you have a bad credit situation and you cannot submit financial documents like income tax return and payslip that banks and mainstream lenders require, you may have to turn to ‘cheap to service loans’ that are usually the most expensive.
It is important to look for a specialised non-bank lender such as Australian Lending Centre that provides low-cost loans to people who are usually turned down by banks due to poor credit and absence of documentary requirements. Resorting to cheap service loans is not worth it, considering the financial cost of credit you can incur in the long run.