Personal loans can be a great option for anyone who needs extra money for personal reasons, such as a way to consolidate debt or make a large purchase. As with any significant financial decision, however, you will want to ask some key questions before you sign on the dotted line.
1. What Is The Current State Of Your Credit?
Do you already have loans or debt you are paying off, such as credit card debt or student loans? If so, can you comfortably afford to make payments per the terms of a personal loan? Will that previous debt prevents you from qualifying for a personal loan in the first place?
2. Will You Need To Make Any Big Purchases Soon?
Before applying for a personal loan, you need to consider whether you have made any major purchases on credit recently or will need to in the near future. Applying for and receiving a personal loan could make it more difficult to obtain a car loan or a mortgage soon after, so planning ahead is important.
3. What Lender Will You Use?
Multiple lenders offer personal loans, so you should compare possible options before you send in a final application. Your bank is a good place to start, but there are a variety of lending companies that issue personal loans as well.
4. How Much Should You Borrow?
A good rule is to only borrow as much as you actually need, or even a little less. The more money you borrow, the more expensive the loan will be over time due to interest. A more expensive loan could also prove more difficult to pay back. You may be limited by how much you qualify to borrow.
5. What Are The Terms Of The Loan?
Another key question to ask is the terms of the loan, specifically how many months the loan is for and how much per installment you are expected to pay. Consider any additional terms as well, such as what the consequences are for not making payments on time, or what the terms are for paying the loan back early.
6. What Will The Interest Rate Be?
All loans carry interest, and personal loans are no different. Most personal loan offers have an interest rate range, with your final rate determined by your credit score and financial history. Be sure to factor in the interest rate when determining if you can afford the loan.
7. What Other Options Do You Have?
Personal loans aren’t right for everyone, and there might be alternative options that are better for your particular situation. For example, if you need to buy a car, getting a specialized, secured auto loan could be preferable. You can also look into getting private financing from family members or friends.
8. Will It Help My Credit Score?
Personal loans can help build a valuable credit history for someone who doesn’t have one. Even a small loan with short repayment terms can build a positive credit history if you make all payments on time and your lender reports that to the credit reporting agencies. On the other hand, personal loans can also hurt your credit score if you already have outstanding debt or run into trouble paying off the loan.
Personal loans make a lot of sense for certain situations, but before applying for one you should carefully evaluate your financial situation to determine if getting one is the right decision for you. Click here to find out more about getting a loan.
About the Author:
Ray is a sought-after thought leader and an expert in financial and money management. He has been published and featured in over 50 leading sites and aims to contribute articles to help novice financial planners. One of his goals is to impart his knowledge in finance to educate and help ordinary people create and achieve their financial goals.