Personal loans are tools that allow borrowers to meet any planned or unexpected expense. With this flexibility comes the responsibility to repay these obligations. As Harit Talwar, head of digital finance at Goldman Sachs, pointed out in an interview, “Debt happens. It’s how you get out of it that counts.” Let us then count the ways you can wisely manage your personal loan toward its successful repayment.
Review Your Financial Situation
Before you take on another debt, evaluate your current finances. Is your monthly income sufficient for another loan payment?
If you were to borrow $5,000 today at 6% per annum to be repaid in 60 months, can you afford to shell out $96.66 every month on top of your existing housing expenses?
Play around with numbers using different loan amounts, interest rates, and repayment periods just to give you a feel of personal loans. Create a budget and figure how this new debt expense fits into your monthly financial picture.
To be more realistic, look up common fees on personal loans. Annual percentage rates cover the interest rate and the costs of borrowing.
Lenders will review your financial situation when they receive your loan application. This is called underwriting and involves checking your credit history, debt-to-income ratio, and employment to gauge your ability to repay the loan.
Recall How Installment Loans Work
Your mortgage loan, car loan, and student loan are examples of installment loans. Your personal loan also works that way; it is repaid in equal monthly payments. Each payment covers the principal and interest of the loan.
Installment loans are generally structured to not include prepayment penalties and balloon payments. However, there are personal loans that require exit fees when you pay off your loan before the payoff date.
Because you’ll be making the same, affordable monthly payments, it should be easy to remember and make timely and regular payments on your loan.
Sometimes, the lender will ask for an asset called collateral to ensure your commitment to repay the loan. While this practice is most common in mortgages (homes) and auto loans (cars), it’s possible that you would be asked to put down a valuable asset as collateral to your personal loan.
Report Your Good Behavior
What is a timely repayment and stellar performance on your personal loan if it’s not being reported to the credit bureaus? Ask your lender beforehand on whether they will report your repayment behavior or not.
Personal loans are one way to build a good credit history and raise one’s credit score. A good credit standing is your leverage to better loan terms, especially the lowest rates, in the future.