Personal Loans
Before you take out a personal loan, you need to sit down and draw up a budget. This is of the utmost importance as borrowing more than you can afford to pay back will leave you in hot water. You also need to determine if you really need to borrow money or whether cutting back on spending wouldn’t be a better option. If you are borrowing money to buy items that should be in your budget, such as food, you are in trouble and I would recommend seeing a debt counsellor. If you need some extra money to fix a serious problem on your car, for instance, then it shouldn’t be a problem. It is still advisable to try and save some money every month to accommodate ‘rainy days’ and avoid creating unnecessary debt.
Once you have completed your budget and you know what you can afford to spend per month on a loan repayment, get quotes on the loan from different financial service providers. Different institutions can offer different rates on personal loans and it is wise to do a bit of comparative shopping. Also, wherever possible, try and keep the term for the loan to a minimum. This will ensure that you have more money left in your pocket once the loan has been repaid.
Whatever you do, avoid paying off debt with debt. Unless you are consolidating ALL your debt with a loan at a lower interest rate, such as a mortgage, paying off debt with more debt will only perpetuate the vicious cycle. This will probably ruin you in the long run. That said, mortgage interest rates are generally much lower than credit cards or personal loans. So if you have the option of consolidating all your short term debt (credit cards, personal loans, overdrafts etc) into your home loan, seriously consider doing so.
However, when consolidating your loans you will still need to pay off your personal loans over the same term as you would have without consolidation. This means that if you consolidate a personal loan that had 12 months left before being paid off at an interest rate of 23% and your home loan has an interest rate of 13%, you need to pay off the personal loan portion within 12 months to reap the full benefit of the lower interest rate.
Keeping these few tips and tricks in mind when deciding what kind of loan you need may save you a lot of trouble in the long run. Also, comparative shopping can be a pain, but doing it could save you a lot of pain and money later.