Money Lessons You Can Learn with a Personal Loan
July 25, 2018
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Nobody wants to be in a position where they have to borrow money, but that doesn’t mean getting a loan is a bad move every time. If you need a car to get to work, for example, taking out a loan can be a practical decision. If you have high interest debt you need to consolidate, borrowing more money with a low interest personal loan can actually help you save money in the long run.
While personal loans have gotten a bad rap, there are benefits that come with taking one out. Personal loans come with fixed interest rates and fixed repayment timelines, for starters, which means your monthly payment will always stay the same. If you have good credit, personal loans can also come with competitive interest rates that are much lower than you would get with a credit card.
5 Lessons You Can Learn with a Personal Loan
A personal loan can also teach you important financial lessons — that is, if you’re willing to listen and pay attention. Before you take out a personal loan, consider what you can learn and how you can use those lessons to your advantage.
Lesson #1: How to Plan Ahead for Recurring Monthly Payments
The first lesson you can learn with a personal loan involves how to plan ahead and budget for upcoming expenses. Since personal loans come with fixed monthly payments that last for a set amount of time, having one can teach you how to plan to make this payment each month regardless of what is going on in your life.
When you have a loan payment due on the same day each month, you get in the habit of anticipating that payment and planning ahead. You know that, no matter what, you owe X amount of money on a specific date, so you get in the habit of saving that amount early.
The underlying theme here is budgeting, and this is one skill you can benefit from for the rest of your life. Today you might just have a personal loan, but you could eventually have rent or mortgage payments, a car loan, and student loans to repay. You might as well learn how to budget for these bills and others early on.
Lesson #2: How Debt Impacts Your Life
Another lesson you’ll learn is just how borrowing money impacts your life. This lesson can be painful, but it’s important nonetheless.
Whenever you borrow money, you have to remember that you’ll need to pay back every cent you borrow plus interest and fees. The monthly payments you’re stuck with are due no matter how much you earned in a month or what is going on in your life.
Keeping up with your monthly payments can also mean sacrificing other things you want. If you wish you could go on vacation but your debts prevent you from building a travel fund, for example, you’ll likely learn very quickly how the amounts you borrow today can alter your future plans — for better or for worse.
Lesson #3: Nothing in Life is Free
Borrowing a flat sum of cash is one thing, but what about interest payments and fees? When you take out a personal loan, you’ll learn how these added costs snowball over time and why it’s so important to shop around for a loan.
You might need to borrow $10,000 to buy a car to get to work, for example. Let’s say your credit score is in great shape, so you qualify for a fixed APR of 7%. If your new loan lasted five years at this rate, you would need to pay $198 per month for 60 months for a total cost of $11,881. At that point, you’ll realize that the additional $1,881 you borrowed basically disappeared into thin air. This sum of cash represents the cost of borrowing, but it didn’t help you get a better car. Also keep in mind that you will pay a much higher interest rate if your credit is poor.
Remember that nothing in life is free. It may be easy to qualify for a personal loan that puts cash in your bank account, but you will pay for the privilege over the long run.
Lesson #4: How Extra Payments Work
Another important lesson you can learn with a personal loan has to do with debt repayment and the impact of additional payments. Ideally, you’ll apply for a personal loan with no prepayment penalties. In that case, you would have the option to pay it off faster without penalty if that’s what you wanted.
If you borrowed $10,000 at 7% APR in the example above and had to pay $198 per month, for example, you could round that amount up provided you could afford it. Not only would doing so help you pay off your loan faster, but it would help you save money on interest, too.
If you paid $250 per month instead of $198 per month for 60 months, for example, you would shave 14 months of your repayment timeline and pay off your loan in 46 months. You would also pay only $1,421 in interest during that time instead of $1,881, which is a savings of over $400.
Lesson #5: Why Your Credit Score Matters
It’s easy to think your credit score doesn’t matter when you’re not applying for loans on your own. However, applying for a personal loan or a credit card will quickly teach you just how important your credit score really is.
According to myFICO.com, loans with the lowest interest rates and best terms typically go to those with FICO scores of 740+. Consumers with scores in the 670 to 739 range may or may not qualify for the best loan options, while individuals with scores of 669 or below may not be able to qualify for a loan at all. If they do qualify, they will most likely pay a much higher interest rate than those with higher credit scores.
Your credit score does matter whether you like it or not, but that fact may not become apparent until you need to qualify for a personal loan. If you have poor credit and wind up with a loan with a high interest rate, this lesson will likely be a costly one.