This question at first glance may sound like an oxymoron - this article will unpack what a personal loan is and whether or not it can be at all a good thing and better yet, if it can save you money
What is a personal loan?
A personal loan, unlike a credit card, provides borrowers with a one-time cash payment. Then, throughout the course of the loan's term, borrowers pay back that amount plus interest in regular, monthly payments.
Personal loans are best used for items that you intend to pay back within five years. Unlike student loans or mortgages, personal loans can be used for whatever you want. As a result, taking out a personal loan gives you greater freedom and control.
Consolidation Loans are one of the most common - and wisest - reasons for getting a personal loan. There are two basic ways to consolidate your debt using a personal loan:
- Using a lower-interest personal loan, pay off high-interest debt (like credit card debt).
- To make debt payments more manageable, consolidate many forms of debt into a single personal loan.
Consolidating your high-interest credit card debt with a personal loan might help you pay it off more quickly. Assuming you use the reduced interest rate and lower monthly payments to speed up your credit card repayment, that is. So the goal is to repay your credit card debt with a personal loan if you want to be debt-free.
Remember though, personal loans should not be used as a way to postpone debt payments.
Now how can a personal loan save you money?
Personal loans provide a wider variety of repayment options than other types of loans, allowing you to choose a period that best suits you, anywhere from six months to ten years.
Consider paying more than the minimum amount due on your personal loan if the monthly expense is lower than it was when you had many debts. Reduce your interest costs by making extra principal payments.
Your credit usage ratio (which is what is used to calculate your credit score) will rise if you have a lot of debt on your credit cards and spend near to your limit each month. Lenders will view you as a bigger risk. Taking out a personal loan to pay off your credit card debt will reduce your overall credit usage.
Credit cards are revolving loans, whereas personal loans have a defined payback period, which means that you must repay the amount by a certain date. You'll be able to lessen your credit utilisation ratio and increase the variety of debt you have by doing this. Because lenders will lend to you at a lower interest rate if you have a strong credit score, you will save money in the long run.
As with any financial product, personal loans are most effective when you have a strategy in place.
Figuring out how much you need in a personal loan is the first step. Personal loans as modest as R1000 are available. If the amount you require is less than R1000, you may be better off saving the money up ahead of time or borrowing it from a family member or friend if you find yourself in a tight spot.
In most cases, personal loans are paid electronically into your bank account. In the case of debt consolidation, however, you may be able to have the money sent directly to your other creditors instead of going via your bank account. Use the latter option to avoid temptation.
A personal loan application gives you the option of selecting the repayment plan that best suits your income and cash flow. In some cases, lenders may give you a discount if you opt to use a debit order for the monthly repayments. In order to keep their monthly payments low, some people choose to pay back their loans over a period of months or even years . Choosing a low monthly payment and a long repayment period is generally accompanied by the highest interest rates. Even if your monthly payments are lower, you'll wind up paying more for the loan in the long run than if you had made the higher overall instalments.
Keep in mind that you'll have to begin repaying your personal loan straight away (usually within 30 days). Before you take out a personal loan, be sure you know what you're going to use it for and how you'll pay it back.