If you’ve recently applied for and been granted a personal loan for clearing your debt, congratulations. The most difficult part is over. The next part is how you are going to use the money. Online personal loans for bad credit or to consolidate debts is no easy task though. To get the most from your loan it requires careful consideration and a strategy for applying the money effectively.
Make your loan cash work for you and your financial burdens will be much easier to manage. Short term planning will get your debt under control; long-term planning could see a debt free you by the end of the loan repayment period.
If the purpose of the loan was to clear debts and to repair your credit score, it is straightforward to achieve both. Follow these three tips for a stress-free financial situation.
Pay off the debts
It may seem obvious, but the reason you took out the loan in the first place was to pay off existing debts. You should mentally ringfence that money solely for debt clearance and use it as soon as possible. Don’t be tempted to use it for Christmas shopping or other treats, or tasks that could wait (redecorating the home, for example); that is a gateway to further debt and a trap that too many people fall into.
Prioritise high interest debt rather than that of the highest value. The main reason debts spiral out of control is not because you’ve borrowed too much, but because of accumulating interest. You could still be paying off the balance long after the original amount is cleared purely due to interest rates. This is especially true of high interest borrowing such as payday loans where the APR is in the thousands of percent. More commonly, debt accumulates most on credit cards because we use them every day. Credit card debt increases rapidly in just a few months of paying only the minimum.
Clearing these two types of debt should be your priority. Once they are cleared, look at the other, smaller debts. Consider closing these accounts to remove the temptation of using them again in the future.
Don’t be complacent
One of the biggest downfalls to debt when people apply for a loan to clear existing debt is personal complacency. It is easy to fall into the trap of believing the money is a panacea for your financial difficulties. While bad credit and other online personal loans can ease your worries and bring high interest debts under control, it won’t solve them.
Too many people fall back into that vicious circle while still paying off the debt. By not strategically planning how to use the money and in not being strict with the plan, there remains a high risk of exacerbating existing debt and ending up back at square one.
It may be wise to monitor your credit score during the process. Most credit checking organisations allow you to do this free of charge with no effect on your credit score. This means you could request several credit reports, one during the period of debt clearance and one as you get close to paying it off. It will allow you to understand your current financial situation and the steps you can take to improve it and keep it improving.
It’s wise for people with a history of bad credit and debt to understand how the spending and debt management decisions they make can affect their credit score. Be conscious of the decisions that could affect your score, and how they affect your score, for better active money management.
Use the flexibility to your advantage
Unlike some other forms of borrowing such as finance agreements, personal online loans for bad credit are flexible; they permit lump sum payments and early clearance. Not all do though, so you would need to check the small print before signing on the dotted line. Some loans have clauses requiring the payment of several month’s interest as a penalty for early settlement to cover their losses on the borrowing. For those that do not, put the money in a ring-fenced account and funnel it through until paid off.
If you encounter a sudden upturn in your financial situation, and can pay off more than is required, it will save you money if you do so with this type of bad credit personal loan. You’ll not only reduce the period of repayment, but also how much you pay in interest. That means more money to work with in the future.
On a final note, customers of online personal loans get the best use from such products when they understand how to plan and learn to make good financial decisions when it comes to borrowing. The flexibility of this type of loan permits that.