9 Questions to Ask Before Getting a Personal Loan
A personal loan can make a tremendous difference in your finances. With a personal loan you can consolidate debt, make a large purchase, or cover an emergency, giving you peace of mind along with set monthly payments. But while a personal loan can help you take control of your budget, taking out a new loan requires a bit of consideration. It’s worthwhile to spend some time reflecting and planning before you start any new personal loan applications.
Why do you need this loan?
If you immediately say you don’t really need it, a personal loan may not be the best choice for you. Borrowing money and paying interest on that money for something you simply want or to “treat yourself” may not be the best use of funds, especially if you are planning a loan that will be paid back over several years.
Is this worth the cost?
Loans cost money, and personal loans are certainly not an exception to the rule. When you take out a new personal loan there will be interest charged on the loan and possible additional fees as well. Consider how those additional costs will add up and decide if borrowing the money is worth the extra cost it will take to pay the loan back again.
Do I need to borrow money?
In some cases, borrowing money through a personal loan may be the only solution to a particular issue. But in others a personal loan or installment loan may be an appealing option, but not the only option. You might be able to cover costs by selling something or using emergency savings rather than taking on a new loan obligation with a potentially long-term repayment cycle.
How much can you pay back?
You will be expected to make loan payments within a few weeks of borrowing the money. If your monthly budget is already completely consumed with other payments, how will you be able to pay back a new loan payment? If you’re using the new personal loan for debt consolidation, of course, you will be replacing credit card payments with your new set payment. But if you’re planning a new purchase, be sure you have enough room in your budget you start repaying the loan when your scheduled payments start.
How long will this take to pay back?
Loan terms are variable, and you have some control over those terms when you take out the loan. If you want to pay the loan back quickly, you can choose terms close to or even less than a year. If you know you’ll need a bit more time, you can choose a longer term for repayment, but keep in mind that lenders increase interest rates on longer loan terms to offset any potential risks.
Shorter payment terms may have less interest but will have a higher monthly payment. Also consider that you’ll be locking yourself into a set payment for years if you choose a longer term, which may cramp your style down the road.
RELATED: What To Know When Getting Personal Loans
How much money do you need?
If you haven’t done the math, you’ll want to pause and do some. How much money do you need to borrow in order to make this loan make sense? If you’re considering debt consolidation, you’ll want to add up the balances of all the cards you’re planning to pay off. If you’re hoping to cover the cost of an emergency, do you have a specific amount you’ll need to pay?
You’ll want to avoid borrowing more money than you need to when you apply for a personal loan. It can be tempting to get a bit extra, but that just winds up being money you need to pay back and it’s almost certainly not worth it.
RELATED: Canadian Guide to Get Out of Debt
How is your credit score?
While there are personal loan options that have no credit score checks, the higher your score, the more likely you are to be approved for most traditional personal loans. If you don’t know your own credit score, look through credit monitoring or order a copy of your score report. While you’re checking in on your score, also look to be sure there aren’t mistakes or fraudulent charges on your report that need to be contested and resolved before applying.
Additionally, the better your credit score the better the interest rate you would probably be approved for when applying for personal loans.
Do you need an alternate means of approval?
If you have a bad credit score, you can still get a personal loan, but you’ll want to apply through a lender that offers bad credit loans. If you’re working with a bad credit score, you don’t need to include it on an application. Instead, focus on your evidence of steady income. Bad credit loans will verify that you have sufficient monthly income, and that you’ve had that level of income for a consistent period. If you meet the income standards for the loan, you can still be approved to borrow.
Do you have stable income?
Whether or not you use your credit score in your application, you’ll certainly need to show evidence of a steady, stable income. Lenders, understandably, want to be sure you can pay back any money you borrow. You’ll need to not only have the stable income, but also have documentation that supports it.
If you get paid mainly in cash and don’t deposit those funds, you may have trouble meeting this requirement, for example. You’ll want to consider what your paystubs and bank account say about your income. Gather the documentation you’ll need ahead of time so you’re ready when asked for it while submitting your application.
A personal loan can be a huge asset when you need the funds, and the loan terms are a match for your budget and financial situation. Before you take on any new debt, you’ll want to consider what the terms of the loan mean for you now and in the future and then put yourself in the best possible position to borrow. Spending a bit of time working through the considerations of a new personal loan can save you some time and hassles down the road.