Personal Loan Tips
May 14, 2007 by SMD
When applying for an unsecured loan, determining how much to borrow and for how long is not easy. Most people do not realize that they can actually save money by borrowing more! It is typical for lenders to impose higher interest rates for loans of small amounts. Therefore, it makes sense to apply for more if you are financially responsible and think that you can avoid the temptation of spending the extra money. You can use the surplus cash and invest into a high interest CD or money market bank account.
How much can I afford?
If applying for more than you necessitate frightens you, we recommend considering the following advice to determine exactly how much to borrow. First, write-up a budget of all of your expenses. Your budget should include all of your monthly bills and daily living costs. Then, subtract the sum of all of your expenses from your net monthly income. Do not assume that the amount left over is what you can afford as a monthly payment for your loan. You should never leave yourself with no money in the event that an unforeseen crisis arises. A rule of thumb is that 75% of this left-over amount can be contributed towards a monthly loan payment.
How much should I borrow?
Now that you have determine what your budget is, you will need to decide how much to borrow. Analyzing the purpose of your loan is very important. For example, if you are interested in applying for an unsecured loan for going on vacation, you need to factor in the cost of renting a car, sight seeing, eating, etc..
If the intent of your financing is for making repairs or improvements to your home, you need to consider unexpected issues that often arise during the construction process. For example, the cost for materials often exceeds the estimated price. Also, it is very possible that more materials are going to be needed than initially thought.
** It is important to note that if you are interested in a loan for consolidating debt, you will no longer have to pay the interest rates associated with the credit cards. Therefore, when determining how much you can afford, do not include credit card interest costs
How long should I borrow for?
The term of your loan is the length of time that you borrow money for.Most unsecured loan terms range from 12 – 72 months.
It is important to understand that the longer the term of your loan, the more money you are going to pay over the life of the loan. The longer the loan, the less your monthly payments are, but the more you are going to pay interest costs.
Depending on what you are going to use the loan for and what your financial situation is, it may make more sense to utilize a longer term. For example, suppose the electrical wiring in your home goes bad and it needs to be repaired ASAP! But, you just moved into the residency and you have no equity for a second mortgage. Even worse, you are having a hard time paying your current bills. For this scenario, it would make sense to apply for a longer term loan instead of stressing to pay a higher monthly premium associated with shorter term loan just so you can save some money. It is always good to save money, but keeping your sanity is more important!
About the author:
Julie Mann is a financial expert that works for ChoicePersonalLoans.com. Choice provides financing for people of all credit types, for any purpose!
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