How To Use A Personal Loan

Posted by Nick Niesen on November 8th, 2010

There are as many uses of personal loans as there are people who borrow them and most lenders will be happy to allow you to borrow for whatever purposes you desire. However, there are a couple of general principles that you should apply when deciding how much to borrow, what type of loan to take out, and how long you want to take to repay the loan.

One of the first and most important guidelines in this regard concerns secured loans. Secured loans will be secured over your home and will give the lender a right, in the event that you fail to repay your loan, to sell your home to recover the amount owed. This is a serious event that you will wish to avoid at all costs and by following a few simple principles you should be able to drastically reduce the chance of this occurring.

You should not, as a general rule, secure loans over your home that are going to be used on short term expenditures. While this will mean different things to different people, it is fairly clear that you shouldn?t be securing a loan on your home to pay for a holiday. If you were to do this every year, it probably wouldn?t take long before all the equity in your home will have been used up on holidays. This will place your home at a higher risk of repossession as a result. At the same time, it is perfectly normal to secure a loan over your home to pay for an extension or some other form of home improvement. Assuming you can afford the repayments on the loan, the extension will increase the value of your home, thus creating more equity, while at the same time allowing you to enjoy the benefits of the money used. This would be a good example of what a secured loan should be used for.

Other circumstances will be less clear and it will be up to the individual in each case to decide if they are happy to have the loan secured against their home or not. These examples could include paying for education such as a university degree or a masters, paying for a car, or consolidating other debts.

Another general rule is that loan repayment periods should roughly match the period for which you will enjoy the benefit of the purchase. This would cover all loans so for example, if you think a new car will last you at least five years, then it will be sensible enough to spread the payments over five years. However, it may not make sense to spread the cost of the same car over fifteen years.

Try being smarter with your cash and shop around for the best deals on personal loans. With the internet it has never been easier as it is now to compare and save by choosing a personal loan with the lowest rates.

One word of caution, read the small print to make sure you know exactly what is expected of you by taking out a personal loan. Many loan companies will charge you an early repayment redemption penalty.