Also referred to as consumer debt, personal debt is a type of loan acquired for consumption rather than investment. It’s often used to buy consumables and doesn’t appreciate like invested funds. Sometimes, personal loans could be used to finance a start-up. No matter the reason you choose to acquire personal loans, here are 5 essential rules you must follow.
1. Weigh all your options
Going into personal debt shouldn’t be your priority. There are many other safer and more reliable methods to raise cash for your business or household. If you are creating a tangible product that other people might be interested in, crowdfunding is an excellent option. Also, you can seek funding from renowned investors. If nothing works, consider getting a personal loan.
Every credit service has both limitations and benefits. And it is important to know these details before you choose to go into personal debt. This way, you can be sure of making the right choice.
2. Pay your existing debts
Try to eliminate all your existing debts as much as possible. Accumulating thousands of dollars of credit on top of your existing debts isn’t a good idea. Probably your startup will not turn in substantial profits immediately. During this period, the compound interest rate could leave you with a huge debt compared to what you began with.
Besides, debt accumulation could impact your credit score negatively. This might make it more challenging to get a personal loan at a favorable interest rate. Therefore, it’s in your best interest to pay your existing loans before you start a business or acquire more debt.
3. Get to know what you’re signing up for
Obtaining a personal debt implies that you are going to be personally liable for getting the loan paid off. In case your startup fails, you will definitely owe all the money you originally applied for plus the interest. That means you must be aware of the possibility of your business succeeding.
Well, it is tempting to think that your business idea is so perfect that it’s a sure-win. However, business plans can be good on paper and fail during the implementation of that plan. Business-failure numbers are often overinflated. About half of businesses usually make it to the 5-year mark. What most people don’t know is that such businesses are owned by highly experienced entrepreneurs.
Your business might not be such a sure thing, as you may have previously thought. Therefore, you should understand the details of the personal loan you intend to take. And make the right choice.
4. Shop for the best interest rates
It is recommended to take your time to shop around for various loan options if you plan to secure new credit. Consult with different lenders and try as much as possible to negotiate a better deal. Focus on finding a loan with the lowest interest rate and better terms. Avoid credit cards and, instead, choose a favorable personal loan.
For example, you should avoid the 0% percent trap. Credit card debts and car loans sometimes might promise zero % financing. However, this might not save you much money as you think. In fact, if you are not careful, such loan terms could cost you more. The moment you drive out of the parking lot, your car is worth 40% less than it would if you had purchased it in cash.
With credit card debts, you will come out ahead if you get your credit card balances paid off before the expiration of the offer date. If you are late on payments, you might end up being charged interest on the entire cost of the product.
Some personal finance experts recommend securing a loan with a personal asset. This might help you get a better interest rate and terms. However, this means your asset can be seized by the lender in case you default payment. So, plan effectively and choose a lender who can extend affordable credit services at favorable terms.
5. Always have a backup plan
You need to understand that your business isn’t immune to failure. If you had used personal loans to finance the business, this would leave you personally accountable for all your debts. So, what will you do if this happens? Will you consider going back to your career? Or will you stay with a close relative for a short period while making some cash to repay your debts?
You have many options. And if you choose to get personal loans, make sure you have a backup plan.
You probably have heard the stories of businesspeople accumulating personal debt and worrying about finances. So, if you choose to go into personal debt, adhere to the rules discussed in this article. This can help you acquire personal loans and repay the debt safely.