How to Use a Personal Loan Wisely

[Mar 19, 2009.]

 

An unsecured personal loan can be a real lifesaver, allowing a borrower to pay urgent bills such as income taxes, a deposit on a place to live, or school expenses.

But before taking out an unsecured personal loan, it's important to realize that, at the risk of mastering the obvious, money doesn't grow on trees, and loans must be paid back. Once that basic realization has sunk in, consider these techniques for using personal loan proceeds wisely.

Borrow Only What's Needed to Pay Low Interest and Low Payments

The temptation when obtaining a personal loan is to take out a little "in case" cushion. For example (and an apt one with April 15th approaching), let's say a taxpayer needs a loan of $1,000 to pay a tax bill. Otherwise, IRS penalties and interest will accrue, and nobody wants that.

Take out a personal loan for $1,000. Not $1,200, not $2,000, not $5,000.

By taking out a personal loan for the right amount and no more, interest rates are kept at a mininum. Remember: an unsecured personal loan is a risky proposition for the lender, so the more the borrower wants, the higher interest the lender must charge to cover the risk.

Morever, repayment schedules are much lighter for $1,000 than for $5,000. Not only because of the increased size of the loan, but because of the interest that accrues during repayment.

Shop Multiple Lenders If At All Possible

Another temptation, especially when the need for money is pressing and/or bad credit is involved, is to take the first unsecured personal loan that comes along. It may be that a particular personal loan is the only one available at this time. But then again, a better deal may be just a phone call or Internet application away.

It's worth looking around a bit. Chances are that a borrower who qualifies for one personal loan may qualify for another personal loan. By comparing lender rates and terms, the best deal can be obtained.

Read the Contract, and Ask Questions

The contract on a personal loan may not be like reading your favorite novel, but read it you should. And ask questions about parts you don't understand.

Parts that absolutely must be understood include interest rates, repayment schedule, and total repayment amount. People who know the terms of a loan are more likely to use a loan's proceeds wisely than those who simply sign, spend, and think they'll figure the rest of it out later.

 

About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.