Including a Personal Loan Payment in Your Budget
Most of us have considered taking out a personal loan for one reason or another. We may have a big expense to cover like a wedding, a new car, or even the birth of a child. The loan itself is usually not the point of concern for most people, however. Most people wonder how they will fit a personal loan payment into their budget. This can be tricky if you’re already cash strapped and burdened by a lot of debt. However, it can be done. A personal loan can often be beneficial to your credit if it’s handled properly.
In addition to helping you afford a big purchase or investment, it can also help build your credit if you make your payments on time and follow the terms of your loan. As a result, it’s a good idea to understand how personal loans work and why having a budget is essential to effectively maintain a personal loan.
Do I Need a Personal Loan?
There are many reasons why a person may be led to apply for a personal loan. For many, an unexpected expense may come up that supersedes their credit card limit. For others, they may not have a credit budget that will allow for a particular purchase or they may not have a credit card. In addition, you may want to start your own business and lack the funds for all the things you’ll need to do, both planned and unplanned. In addition, some of the reasons for seeking a personal loan may be to simply sustain yourself or your family during a financially difficult time. For example, you may be interested in getting a personal loan to pay your rent. Regardless of the reasons, there are a variety of different situations that may lead a person to seek a personal loan.
Knowing Your Budget before Getting a Personal Loan
Most of us have a budget that we adhere to on some level. If you don’t, you should. A budget is your financial roadmap. It helps you maintain your lifestyle and pay for the things you need as well as want. This is why it’s a good idea to create a budget if you haven’t already. Creating a budget helps you to create a financial roadmap that guides what you can and can’t afford. In addition, before you apply for a personal loan, it may be a good idea to use a loan checker. A loan checker is a tool that helps you to determine how much you can afford to borrow.
This is a beneficial tool because every credit inquiry has the ability to negatively impact your score, especially if your loan application is rejected by a lender. A rejection also means that you will probably end up applying for another loan which will result in another credit inquiry. Another inquiry may also have a negative impact on your credit. Use a loan checker to determine how much loan you can afford. This will help you to determine the best amount to borrow and may help improve your chances of getting approved for a personal loan. This should be a part of your budgeting tool. This tool will realistically show you how much you can afford to borrow based on your current financial situation.
Your Budget vs. Your Personal Loan
Logically speaking, your existing budget has to cover both your current obligations and your personal loan payment adequately. This means that there are two factors that you need to consider heavily: How much you need to borrow and the amount of Personal Loan Payment you can pay back monthly and still cover your other financial obligations.
Before you fill out any paperwork, these are the two factors that you should actively research and consider. Keep in mind that shorter repayment terms coupled with a smaller loan amount will produce a cheaper interest rate. Once you’ve considered all these pertinent points, you can effectively determine how much to borrow and for how long. This lets you know how much your personal loan payment should be in order to comfortably fit into your budget.
We really like this budgeting application from Every Dollar. They have great features that connect with your bank account. Just drag your expenses to the right spending bucket to begin. Beyond budgeting, here are some other financial apps we really like…
Consider Your Interest Rate
Most of us understand that the interest rate applied to a personal loan greatly determines how much you will have to repay. This is why this is an extremely important area to consider. Typically, banks offer smaller interest rates for larger loans and bigger interest rates for smaller loans. However, it’s best not to borrow more than you actually need and to carefully negotiate an interest rate that won’t increase your repayment amount excessively. This is why you should pay close attention to the annual percentage rate (APR), which is the amount of interest that will accrue and be added to the original loan amount. If you need to borrow less than five thousand dollars, consider other borrowing options besides a personal loan.
Three Additional Considerations…
Sometimes, it may make sense to borrow a little more if you can benefit from a lower interest rate. Conversely, it may sometimes make sense to borrow a little less if it means that you can reduce the amount of interest that your loan will accrue. However, if you want to borrow a particularly small amount of money, a personal loan may not present the best option due to the fact that the interest rate may be a bit higher. You may want to consider other options if you need to borrow a relatively small amount of money. A credit card or some other form of a loan with more flexibility may be a more viable option.
Advertised Interest Rates
The interest rate you’re approved for may be different from the interest rate advertised. Several variables determine the interest rate a person may actually pay. A person’s creditworthiness will determine the interest rate that a lender will offer as well as whether or not the lender will offer a personal loan at all. In other words, advertised interest rates are not guaranteed. Interest rates are based heavily on your credit score.
Budget Budget Budget
The key to managing your personal loan is budgeting. They actually go hand in hand. However, many people don’t understand why this is important and exactly how a budget should be created and how it should work. However, it’s not difficult. Budgets set guidelines for spending and let you know when to cap your spending. The most effective budgets are simple and function by helping you keep an eye on where your money is going.
Creating Your Budget
Divide your expenses into categories. Use broad general categories because it’s easier to track your spending. Your budget should help you to set aside money for your bills and other necessities as well as your Personal Loan Payment. The budget you create should help you to appropriately divide your expenses and Personal Loan Payment into groups that allow a certain amount of money for each bill or necessity.
A Personal Loan Payment is another bill. As a result, you may need to work on your budget and possibly cut back in other areas to effectively cover your Personal Loan Payment and your other expenses. In addition, there are many apps that can help you create an effective budget regardless of how much money you make. Keep in mind that your Personal Loan Payment will have to fit in with all the other bills that must be paid.
Create your budget before the month begins. Anticipate irregular payments that you may have to make. This will help in the event you have to rearrange your bills. If your bills are consistently the same from month to month, use your default budget as a foundation and make adjustments as needed. Your Personal Loan Payment should always be figured in. If necessary, less important bills can be rescheduled or worked out. However, make sure that you make your Personal Loan Payment on time. Late payments and missed payments reflect poorly on your credit and may have more of an impact than a late utility payment.
Create a budget that exhausts all of your income. In other words, budget every dime of your money. Account for everything. In essence, this is similar to having a GPS that allows you to track everywhere your money goes. You can put your budget together by combining all your income sources. The first set of bills you should consider are your fixed expenses, like your Personal Loan Payment. This also includes utilities, groceries, and other expenses that accrue on a monthly basis. Next, track all of your other common monthly expenses like your household purchases and entertainment. Make sure every cent is accounted for. If you still have money left over, put it towards your savings or your Personal Loan Payment.
Keep a close eye on your spending habits. This will ensure that you’re not overspending and that you’re adhering to your budget. This will also alert you if you have some out of hand spending habits. If there are areas where you’re overspending, recommit to your budget or increase it if the reasons are compelling enough. In addition, make adjustments to your budget as needed. A good budget is one that adequately fits your financial situation. As your finances change, your budget should too.
Your budget should be functional and reflect your needs wants and financial goals. However, they must also reflect your current monetary status. If you’re in a period where conservative spending should be an obvious goal, make sure your budget reflects this. In other words, eating at five-star restaurants shouldn’t be a part of your budget if you’re barely scraping by. This is especially significant if you have a Personal Loan Payment that you must honor. Failure to meet your financial obligations, particularly your loans, can result in financial ruin. Be responsible and spend accordingly.
There are always going to be unanticipated situations that pop up and may place demands on an already strained budget. This is why it’s a good idea to budget for the unexpected, as much as you can. You may want to create a miscellaneous budget for these unexpected happenings that can often occur in life. Even your personal loan payment can become hard to pay if you fall under financial hardship and don’t have money set aside to cover the cost. This is why it’s a good idea to budget for the unexpected as well as the expected.
How Do Personal Loans Work?
A personal loan is different from a car and house loan, or any type of loan designed for a specific use. People take out a mortgage to buy a house and apply for a car loan for the express purpose of purchasing a car. A personal loan can come from credit union, bank, or online lender. Generally, they are paid for in two to five years. In essence, a personal loan can be used for any purpose and doesn’t require any collateral. However, it is possible to get a secured loan backed by your car or home which often means that the interest rate may be lower. However, generally speaking, a personal loan does not require any collateral, unlike buying a house.
A personal or consumer loan can be used for any purpose from paying off a high-interest credit card to funding the next family vacation. Typically, personal loans tend to have lower interest rates than credit cards. This is one of the reasons why they are attractive. Once you’re approved for a personal loan, you get the requested amount in one lump sum and make personal loan payments until it’s paid. Although personal loans are fairly simple and straight forward, you should pay attention to the terms and negotiate the best possible interest rate. The terms of a personal loan can vary from lender to lender and this is why it’s important to do your homework and read the fine print.
What to Watch Out For?
As part of your homework, it’s a good idea to know what to watch out for before you take on a personal loan. Familiarize yourself with the pitfalls. One of the things you should pay attention to are excessive fees. Many lenders will charge an application fee in addition to other fees that may add up. However, there are additional fees that you should pay attention to as well and these fees can be quite high. You may be offered loan insurance which would cover your personal loan payment if something were to happen to you or in the event of your death. This insurance can create peace of mind but it will come at a cost. Can you truly afford the cost of this peace of mind? If so, no problem. However, soberly consider whether or not you can afford this cost in addition to your personal loan payment.
Keep in mind that these fees add up and some can be quite expensive. Use wisdom and never lose sight of your budget and how much you can afford to pay. It should be noted, however, that most lenders won’t ask for upfront fees before you get the loan. The fees you’re charged after you’re approved for the loan will be a part of your loan and they won’t be asked for in advance. However, pay attention to
- Personal loan fees
- Exorbitant interest rates
- Loan insurance
Part of your homework is to keep a close eye on any and all fees a loan may require, in addition to interest rates and terms. However, there are other things that you need to be aware of as well. Any lender that has a legitimate shingle must be registered in the state that they are doing business. In other words, even if they are licensed to do business in another state, in order to legally operate as a lender, they must also be licensed in the current state they are attempting to operate a business in. As part of your do-diligence, make sure that the lender or lenders you are considering are legally licensed to operate. Keep in mind that the rules for lenders will vary by state, but licensing is required in every state which represents a different jurisdiction.
People with bad credit often opt for…
In addition, many people who have low credit scores or no credit, often opt for fast loans to help solve some of their financial woes. They may consider these types of loans because their credit is not good enough to get a personal loan. However, although its often quick and easy to get these loans because they are based on your job and the amount of money you make, they often carry large interest fees. These interest fees can be quite high and just how high they are can vary from state to state. Each state has its own rules and guidelines. Furthermore, it’s best to avoid these types of loans because they are often seen as predatory because of the terms and the extremely high interest rates. If you choose to take out a fast loan, try to pay it off as soon as possible.
The longer you have it the more interest you accrue on these high-interest loans. Often, your personal loan payment for a fast loan is nothing more than the interest. In the end, you’ll still end up paying the original loan amount in addition to the high interest rate.
Worst Case Scenarios
Getting approved for a personal loan can eliminate a lot of financial worry for people. In addition, a personal loan can be beneficial because the interest rates are often lower than credit card interest rates as well as other types of loan. However, regardless of how little you have to pay, if you don’t have the money to make your personal loan payment it can be very stressful and scary. Most of us would worry about the consequences of not being able to make a personal loan payment.
Life can throw us many curveballs, and a personal loan payment that was manageable before can become difficult if we lose our job or have to pay bills for a loved one. The wide variety of situations that can occur that could change our financial status can be limitless. However, if you do fall on hard times and have to make a late payment, miss a payment, or find that you can’t pay your loan back at all, be sure to talk to your lender as soon as possible. There may be things that can be done in the event of an unforeseen and unfortunate circumstance like this. In some extenuating circumstances, a lender may be able to offer you a moratorium. This is an extended period where loan payments aren’t required and you aren’t penalized.
However, your lender may not give you a reprieve for a missed payment or for your inability to pay back a personal loan. If you miss a personal loan payment, you may be faced with the possibility of defaulting on your loan if it is more than two weeks late. Many lenders have a two to four week grace period for personal loans. During this period, additional interest doesn’t accrue. However, if your late payment exceeds the two or four week grace period, you may begin to get letters regarding default from your lender and your credit score could plummet as much as 150 points. However, most lenders won’t threaten default until your personal loan payment is ninety days late.
A personal loan and a budget should go hand in hand.
You shouldn’t apply for a personal loan without a commitment to maintaining a budget. A budget will ensure that you can make all of your personal loan payments and maintain your other financial obligations as well. Plus, a budget helps you to determine how much loan you can afford and reasonably fit into your current lifestyle. Failing to budget is similar to planning to drop or neglect a financial obligation which could result in unsatisfactory changes in your credit and in your lifestyle.
If you have a family, this could mean the difference between putting food on the table, paying your rent or mortgage, or simply having enough money to pay for a much-needed car repair. Before you take out a personal loan, commit to creating a budget if you don’t have one. If you do have one, stick to it and make adjustments as needed. All of these actions will help you consistently make your personal loan payments and effectively manage your finances.
A personal or consumer loan is a big responsibility, even though the financial benefits can be quite helpful. However, a personal loan requires a certain level of personal responsibility and that begins with a thorough understanding of how personal loans work and a solid budget to ensure that you can meet the terms of your loan agreement.
About the Author – Nwayita P
Ethan founded OfferEDGE in Dec 2013 with the mission to unify the financial quadrants through a system that allows businesses to be seen when consumers use a Single Sign On across Lending, Credit, Money and Real Estate. Taub invents the offers and IP, while overseeing all aspects of the company. He also has orchestrated the company’s earned media across the brands Loanry®, Cashry®, Debtry®, Budgetry®, Billry®, Taxry® and more. This includes over 500 publications that have been featured across the web.
He has more than 18 years of experience in C-level Management, Sales, Marketing and Product Development across billion-dollar brands to innovative technology start-ups. Taub holds a degree in Economics from the University of California, Berkeley.