Taking out a personal loan is a decision one shouldn’t make on a whim. Ideally, you wouldn’t want to take out a loan since it means putting yourself in debt. But life is rarely ideal and financial problems will come, sometimes putting many of us in situations where a loan is the best option.
When to take out a personal loan
Are loans always bad? Far from it. There are many circumstances where taking out a loan is a practical move. Some of these include:
- Consolidating credit card debt
- Paying off high-interest debts
- Financing a big purchase
- Paying for a major life event
- Improving your credit score
Taking out a loan for the purposes stated above can allow you to save money as they generally cost less than paying with a credit card. Also, note that they all involve paying off debt, financing a major expense, and improving your credit score — all of which contribute to achieving financial wellness. If somehow you’re planning to use a personal loan to finance a business venture, which may fall under a big purchase, then make sure that the amount aligns with your business goals.
If you’ve assessed your situation and concluded that taking out a loan is within your best interest, then it’s time to do more thinking. No matter how practical your purpose is for taking out a loan, it’s still a decision that requires a lot of thought. Keep in mind that you’re putting yourself into debt, so you want to do it only after taking everything into consideration.
Your credit score or rating
A good credit score tells banks that you can pay off debt on time. They use it to determine whether they should give you a loan or not and the interest rate, should you qualify. In addition, having a good credit score will allow you to negotiate for lower interest rates.
Before you talk to your bank about taking out a loan, make sure you review your credit history. Take time to ensure there are no discrepancies that might sabotage your loan application. Should there be problems, you should have them immediately settled with the rating agency.
It will be difficult to get approved for most loans if you have a bad credit rating. You should be taking steps to improve your credit score, but that takes time. Still, that doesn’t mean you don’t have immediate options. If you get to know what title loans are, you would be able to take out a loan despite a problematic credit history. The caveat? You need to use your assets, most often your car, as collateral.
The loan amount
Makes sure you borrow only what you need. If you’re already set on what you will be using the loan for, make sure you only borrow the amount you need for that purpose. If you need $100,000 USD for the renovation of your house, then borrow only that amount, unless you need more for other purposes.
Your ability to repay
Before signing an agreement, you should consider whether you are capable of repaying the loan you’re applying for. Is your current income enough to pay the dues? How much money will you have left for other expenses? Will you be scraping by just to repay the loan or will it be just a minor inconvenience? Answering these questions helps you decide how much will you be borrowing and what payment option will suit you best. Understanding your ability to repay will be the basis of your repayment plan.
Interest rates in the market
Your credit score greatly affects the interest rates you can get, but it will still differ from bank to bank. Make sure you scour the market for the lowest interest rates you can get before you make a commitment. Some banks will be more generous than others. Taking time to find the best rates is worth it since it will make paying off your debt a lot easier.
There are fees involved in taking out a loan, and while most of them are made clear right at the get-go, you should still go out of your way to ensure the bank does not have any hidden fees. If it’s your first time applying for a loan, then it’s even more important that you know which fees to avoid. Some of these are documentation charges, application fees, and origination fees. This is the point where you go over the agreement thoroughly to make sure there are no costs sneakily hidden somewhere in the paperwork. If you don’t understand something, ask the financial institution for more information or consult an expert on the matter.
Personal loans are usually not secured, which means they don’t require you to collateralize an asset. Still, there are secured personal loans and if you sign up for one, you need to decide which of your asset should be the collateral. It can be your home, a vehicle, or an investment account. These options have their own pros and cons so make sure you choose the one that suits your situation best.
Taking out a loan is a big financial decision that requires plenty of thought and planning. If you’re going to put yourself into debt voluntarily, then you better make sure it will be worth it. Getting a loan doesn’t automatically mean you’re financially irresponsible, but you can easily put yourself in a bad financial situation if you don’t consider these important factors before applying for one.