Personal loans can feel like a God-send when you’re in a financial pinch or when you want to increase your nest egg. However, without the proper guidance, it can be easy to blow through a personal loan. While that’s tempting, your real goal should be to get the most value out of your personal loan. To do that, you have to know what kinds of loans are out there and what the possible drawbacks to each are. Then you can finally make an informed decision that will allow you to get the most value from your loan.
Doing Your Homework
Like anything else, you need to look at several kinds of loans as well as your personal credit. On the one end of the spectrum, you have title loans, which don’t require good credit. Rather, you need collateral – a vehicle in this case – in order to qualify for this type of loan. On the other end of the spectrum, you have the signature loan, which requires a very good credit history to get. Knowing how to squeeze the most value out of your loans requires you to know what pros and cons each type of loan has. You should also know where you stand with your finances, according to Forbes. You will acquire this knowledge by doing research on the different kinds of personal loans, something that Forbes also recommends.
What Are the Advantages?
Both have their advantages. Usually, you won’t experience an unauthorized credit inquiry when you get an auto pawn loan as they don’t require credit to get. That’s definitely an advantage. However, the maximum amount of money you can get with a title loan is determined by the value of your car.
Signature loans also have some advantages. Paying off a signature loan means that you’re a good credit risk, which in turn allows you to build more credit. More credit means being able to borrow more money on signature down the road.
What Are the Disadvantages?
It’s within the disadvantages of each of these types of loans that you get an inkling of how to get the most value out of your personal loan. Here’s a look. According to Nerd Wallet, some loans come with prepayment penalties. These can cost you a great deal of cash just for paying off your loan early. Some personal loans can also have high interest rates, but many have lower interest rates than credit cards.
Loans on the title of your car can have even higher interest rates at 25% a month, according to the FTC website: That’s a definite disadvantage for this loan type. You wind up paying a lot more money in the end with these loans, especially when you consider roll-over fees. Many times these are so much, you wind up paying more in the process of paying back your loan than you originally borrowed.
Getting the Maximum Value From Your Loans
Despite the high interest rates on some types of loans, it’s still possible to get a good value out of your loan. First, if you can get a loan with a lower amount of interest, use these financial tools to pay off some of the higher-interest debts you have as well as loans or lines of credit.
Additionally, making the most of your loan may actually have nothing to do with your loan, but rather what you do with your money elsewhere. Once you get your loan, put the money from the loan into a savings account that has a high interest rate. If your personal loan interest rate is 12%, and you put the money in a savings account that get even just 3%, you effectively lower the rate of your loan to 9%.
If there are no pre-pay penalties, then pay off your loan early if you can. Often the amount of money you have to pay in interest is what really takes a chunk out of your wallet. Shave off months or even years from a loan to save cash in the end, according to The Nest.
Hidden Ways to Find Value
Aside from giving your credit a boost, a personal loan gets you into the habit of making a payment toward the loan each month. “So?” you might ask. At some point, it’s likely that you don’t even miss that money. If that’s the case, then it might benefit you to keep funneling the money into your finances in another way.
If you still have high-interest-rate debts that need to be paid off, why not consider a debt snowball? For those who haven’t heard of Dave Ramsey’s debt snowball concept, here’s how it works. You pay off your debts from the smallest amount to the largest amount until you’re out of debt. Given that you’ve already paid your personal loan off early – and possibly saved thousands of dollars in the process by doing so – you can keep the savings going by putting those saved dollars toward the rest of your debt. You’ll be out of debt and have sterling credit by the time you’re debt-free.
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