A personal loan can be one way to get your finances back on track and improve your situation. With a personal loan, you can make a large planned purchase, cover wedding expenses, or even consolidate credit card debt.
When you get a personal loan, you can use the funds for almost anything. This can be a way to manage a financial emergency or provide long-term support for your money goals.
However, it’s important to realize that a personal loan isn’t for everyone. Depending on your situation, and without planning, you could actually end up in a worse financial situation as the result of a personal loan.
Before you move forward, here are things you can do to get the most out of your personal loan.
5 Things to Do Before You Get Your Personal Loan
Most personal loans are unsecured, meaning you don’t need to risk collateral for repayment if you cannot cover your loan payments.
Still, getting an unsecured personal loan won’t help you reach your financial goals on its own.
You want to get the most out of your personal loan, so lay the groundwork ahead of time.
1. Review your credit report
Start with your credit report. The interest rate you receive on your personal loan — and the total cost you pay — depends on what’s in your credit history.
You can get a free credit report from the three major credit reporting agencies weekly. TransUnion, Equifax, and Experian offer free weekly reports when you go through AnnualCreditReport.com.
Check your credit report for errors and fraudulent accounts. Mistakes on your credit report or fraudulent accounts can lower your credit score. This can lead to more expensive debt. A low-interest personal loan can provide an efficient way to access money to improve your finances. You need good credit to take advantage of the best deals, however.
You’ll get more from your personal loan if you start by double-checking your credit history and making sure everything’s accurate. Don’t let errors drag down your score and lead to a more expensive personal loan.
2. Improve your credit if needed
If your credit score is relatively low, look for ways to improve your credit.
If your score is below 670 (what FICO considers a “good” score), you risk a much higher interest rate. This makes your loan more expensive.
Making on-time payments, reducing your credit card debt (if possible), and keeping older loans open can help you improve your credit score.
In some cases, you might be able to improve your credit by correcting mistakes. If there’s inaccurate information on your credit report, submit a dispute through the credit reporting agency. Once the information is updated, your credit score should improve, and then you can apply for a personal loan and get a potentially better rate.
3. Understand the total cost of the loan
When deciding on a personal loan, don’t just look at the interest rate.
There are other potential costs associated with getting a personal loan. Some of those costs include:
Origination or administration fees
Find out if an extra fee is added to the loan at the beginning.
This might be called an origination or administration fee.
Sometimes, it reduces the money you receive from the personal loan.
In other cases, it’s a percentage of the loan amount that is added to the balance — and you pay interest on this fee along with the rest of your loan.
Take a look at this cost and run the numbers to see if it’s worth it. Another option is to look for a lender that doesn’t charge an origination or administration fee.
Prepayment penalty
Few lenders charge this fee, but it’s still possible.
With a prepayment penalty, you’re stuck paying a fee if you pay off your loan early.
Look for a lender that doesn’t charge a prepayment penalty so that you can get rid of your debt faster.
If you can pay off your debt ahead of schedule, you save money in the long run.
Variable rates that can rise over time
While many personal loans come with fixed APRs, some still charge variable rates.
A variable rate might seem low initially, but it can increase if interest rates head higher. Over time, this can lead to higher monthly loan payments and cost you more money.
Carefully review the terms, so you understand the full potential cost of the loan. Do your best to make choices that reduce the total cost of the loan so that less money is going to the lender.
4. Compare loan terms
When getting a personal loan, compare three and five different loans to get an idea of what to expect.
You want to get a loan that works best for you. Some of the items to consider include:
Loan term
Many personal loans have terms of between 24 and 84 months (two to seven years).
Longer terms often come with lower monthly payments, making them more affordable. However, a longer loan term can lead to a higher overall cost even at a lower interest rate.
You need to weigh your need for a manageable payment with your desire to get rid of the debt faster and for it to cost less. Look for a loan that fits your needs.
APR
The annual percentage rate is how much the loan costs annually.
Let’s say you borrow $15,000 for 60 months (five years). Using the AmONE installment loan calculator, you can see that you would pay $4,122.34 in total interest over the life of the loan with an APR of 10%.
However, with an APR of 18%, you would end up paying $7,854.08 over the life of the loan. That’s a higher cost of more than $3,700.
Loan amount
Be realistic about the loan amount you need. Consider whether it makes sense to borrow more or less based on your true needs.
In most cases, it makes sense to borrow as little as possible. Look for a lender that offers the amount you need so that you only take out one personal loan.
Secured vs. unsecured
In general, an unsecured loan is likely to help you make the most of the situation.
However, there are cases when a secured loan can result in a higher loan amount and a lower interest rate.
Carefully determine whether you want to risk losing an item of value to secure a loan for terms that better fit your needs.
Get prequalified by different lenders to consider your options. For the most part, prequalification shouldn’t impact your credit score.
5. Have a plan to repay the loan
As you prepare to get your personal loan, don’t forget to make a plan to repay the loan.
Look at your budget and avoid getting a loan payment that you can’t afford.
A personal loan can help you improve your finances, but only if you have a plan to repay it. Before getting your loan, make sure you know how to approach repayment and create a plan for making sure that you can meet your obligation.
Compare rates and find your best personal loan.
5 Things to Do After You Get Your Loan
Now that you have your funding, you want to get the most out of your personal loan by making good money moves.
After receiving your loan, here are the things you can do to make positive financial progress.
1. Pay on time
The best thing you can do is make on-time payments. Your payment history is the most important part of your credit score.
When you pay on time, you improve your credit score, which can help you get better rates in the future. Plus, as long as you pay on time and in full, you can avoid negative marks against your credit.
2. Consider paying off the loan early
As your financial situation improves, consider making extra payments toward the principal to get rid of your debt early.
Making a few extra payments each year can reduce what you owe and get you out of debt faster. This saves you money and provides peace of mind.
3. Review your credit report
Double-check that your on-time payments are showing up in your credit report. Confirm with your lender that they report your payments to a credit bureau.
Your lender might not report to all three major bureaus, however. Find out which bureau the lender primarily reports to and review your credit report to ensure that your regular payments are reflected.
It’s also a good idea to keep an eye on your credit score to see whether you qualify for different financial products and services at lower rates.
As you pay on your loan, and as those payments are reflected in your credit history, you’ll get better access to different financial services that can benefit you in the future.
4. Refinance if it makes sense
Depending on the lender, as your credit score improves, you might have the opportunity to refinance your personal loan.
You can also compare your refinancing options with other lenders.
When you refinance, avoid getting a higher balance or longer term. Instead, look to pay off your current balance with a new loan that has a lower interest rate and/or a shorter loan term. This can save you money in the long run and help you discharge your debt faster.
5. Avoid getting into more debt
Finally, the best way to get the most out of your personal loan is to avoid getting into more debt.
A personal loan can be a powerful tool to consolidate credit cards and other higher-interest debt. However, if you pay off your other loans with a personal loan and then rack up more debt, you’re in a worse position than before.
Your personal loan should help you enhance your finances, not get you into more trouble.
Having a good plan to repay your debt and sticking to a financial plan that allows you to live within your means can help you use a personal loan to your advantage.
FAQs
What are the advantages of a personal loan?
Personal loans have potentially lower interest rates than credit cards and other debts, depending on your credit situation.
This can help you pay off debt faster and save money.
Additionally, personal loans can be used for different purposes, allowing you to address emergencies, plan major purchases, or consolidate debt.
How much can I borrow with a personal loan?
Lenders offer different amounts. You can usually borrow between $1,000 and $40,000 from many personal lenders.
Some lenders offer up to $100,000 in personal loans. However, you should carefully consider your situation and only borrow what you need.
How fast can I get my money with a personal loan?
Many personal lenders can deposit the money in your account as soon as the next business day. Review the loan terms to find out how quickly you can expect to receive your funding.
