Personal loans can be highly useful for managing finances, covering unforeseen bills, and supporting major life events.  They are a great alternative for people who need quick access to funds, as certain lenders can deposit funds into your account within a short period of time.

To prevent becoming potentially over-indebted, it is important to use them effectively and with caution, just as you would with any other form of financial tool.  Having good insight and maintaining financial stability is essential needs understanding the right ways to get and, most importantly over all, pay back personal loans.

Let’s look at these five strategies for handling personal loans so they do not control you.

Duration Matters: Choosing the Right Term

The term of a personal loan refers to the time period over which you will return the borrowed amount plus interest that has accumulated. According to Forbes Advisor, Forbes recommends that you carefully analyse your loan terms before accepting a loan because they have a direct impact on your monthly payments and long-term expenditures.

When selecting a term, attempt to strike a balance between keeping your monthly payments affordable and lowering your total interest costs. It is important to achieve balance. 

**Do**: Choose a loan term that matches your short and long term financial goals and capability to make consistent payments and will allow you to repay the loan quickly and comfortably, while avoiding high interest rates. 

**Don’t**: Extend the loan period beyond what is necessary. Longer terms usually result in cheaper monthly payments, but they can lead to greater overall interest fees. 

Pro Tip: Make use of the Personal Loan Calculator provided by your financial institution. This tool can help determine what monthly payments and total costs will look like over the life of a personal loan. Since most personal loans come with fees and/or insurance, the end cost of them can actually be higher than advertised.

Understanding Short-Term vs. Long-Term Personal Loans

An unsecured loan that needs to be repaid may be returned quickly—typically within one to twelve months—is known as a short-term loan. Generally, loans range from R1,000 to R15,000.

If you have unexpected costs to pay for, such as an emergency trip to the doctor or essential auto repairs, a short-term loan can be your best option.

Considering this, they might be excellent choices for you to pay for bills that you might not otherwise be able to. However, understanding the costs associated with this short term fix is important. 

Typically, long-term loans are used for larger financial obligations. These loans are paid back over an extended period of time. Long-term loans are the ideal choice when seeking funding for projects or investments that require time to generate returns. Due to their extended repayment terms, these loans often come with lower interest rates. 

**Do**: Choose a short-term loan if you can afford higher monthly payments and aim to pay off the debt quickly to minimise interest charges. However, some one-month loans can come with extremely high interest rates. Many payday loan providers charge the full 60% maximum interest rate (5% per month). Short-term loans are suitable for immediate financial needs and can help you avoid prolonged debt.

**Don’t**: Commit to a long-term loan solely for the sake of lower monthly payments without considering the long-term financial implications. While long-term loans offer lower monthly payments, they often result in higher overall interest costs. Overcommitting to multiple short-term loans could would result in unaffordable monthly debt repayments.

Avoid Multiple Personal Loans At The Same Time

There is no law stopping you from taking multiple personal loans, provided that your lenders approve them. This can also be quite appealing, especially if they are readily available to you. When presenting offers to you, lenders will take into account how you are repaying your present loan(s), your debt-to-income ratio, your affordability, and your credit score.

The issue with having multiple personal loans at the same time is that it can rapidly stretch your budget and leave you over-indebted. Each loan has its own set of monthly payments and interest rates, which can quickly become difficult to track.

**Do**: Before you consider taking out new loans, give priority to paying off current debts.

Evaluate your financial needs carefully and consider alternative solutions before taking out multiple loans. 

**Do**: Rather than giving in to instant gratification, ask yourself if you really need the item right now or if you can save up to purchase it in the future.

**Don’t**: Succumb to the temptation of borrowing beyond your means or taking out loans for non-essential expenses. Overextending yourself financially can put you in a debt cycle that gets harder to escape.

Pro Tip: Multiple credit inquiries can negatively affect your credit score and remain on your report for two years, according to ClearScore. That means if you apply to several lenders during a short period of time, they may assume that you are a high-risk applicant. 

Beware of Quick Loans and Loan Sharks

Quick loans and loan sharks prey on individuals in urgent need of funds, often trapping them in high-interest debt cycles with unfavourable terms and conditions. Loan sharks can even pose the risk of physical harm and intimidation, and they often request to hold personal items as collateral.

**Do**: Exercise caution when considering quick loans and thoroughly research the terms and reputation of the lender before proceeding. Explore alternative borrowing options and consider seeking assistance from reputable financial institutions or community resources.

**Don’t**: Falling victim to predatory lending practices that offer seemingly convenient solutions but come with exorbitant interest rates and hidden fees. Always read the fine print and fully understand the terms of any loan agreement before signing.

**Don’t**: Make use of the services of unregistered credit providers: 

Pro Tip: Verify credit providers on the NCR website, NCR Register

Pro Tip: These days, loan sharks have become increasingly better at scamming people and appearing to be legitimate. Always be sceptical of offers that seem too good to be true. You should not have to pay any upfront fees in order for your loan to be “released”.

Debt Rehabilitation options

In order to master your current personal loans, you have to ensure that you pay your debt repayments on time each month. When living expenses and debt repayments become too large to handle, it’s easy for consumers to fall behind on their debts. Luckily, there are debt rehabilitation programmes out there to assist consumers in managing their debt.

Debt counselling and debt consolidation can be valuable resources for individuals struggling to manage multiple debts or facing financial hardship

**Do**: Seek professional advice from reputable debt counselling services if you’re experiencing difficulty managing your debts. Debt counsellors can provide personalised guidance and help you develop a plan to regain financial stability.

**Don’t**: Ignore warning signs of financial distress or resort to predatory lending practices, such as payday loans or loan sharks, which can exacerbate your financial problems and could lead to further debt.

While personal loans can provide financial flexibility and assistance when needed, responsible borrowing and careful consideration of the terms are essential to avoid potential pitfalls and maintain long-term financial health. By adhering to the do’s and don’ts outlined above and staying informed about your options, you can make confident decisions that support your financial well-being.