5 Things You Need to Know Before Taking Out a Personal Loan
If you’re looking for a personal loan, taking out a personal loan can be a lifesaver for many. With that being said, it have both its advantages and disadvantages.
However, it all depends on you and your financial circumstances. Taking out a personal loan can be a big decision to make, but before you decide to take out a personal loan, consider thinking about these 5 things first.
1. Why are you taking out a personal loan?
Are you dreaming of a new car? Or perhaps you need a little extra money for your fairy-tale wedding or you are planning to start a family? Personal loans are good solutions for sound financial investments such as:
- paying for emergency bills or situations
- paying for an event like a wedding or funeral
- consolidating your debt
- paying off your credit card
It is not, however, in your best financial interest to take out a personal loan for an impulse buy — or without fully understanding your options. You need to take the long view on how this loan amount will fit into your personal budget. When deciding to take out a personal loan, it should be for the right reasons and not just for materialistic reasoning.
2. Personal loans can come in handy
If you find yourself in need of cash due to unexpected bills like a medical emergency or broken kitchen appliances, you may consider taking out a loan on your home. However, be sure that a personal loan is what you need for your financial circumstances. Personal loans can come in handy in situations where you are short of cash. The funds are usually accessible soon after applying and being accepted, although this varies depending on the individual. Although it’s not immediate, it might make more financial sense long-term.
3. Your credit score is essential
Because taking out a personal loan does not involve collateral, your credit score is essential in determining your interest rate. If you do not have good credit, you can expect the lender to hike your interest rate. This helps them cover your risk of default. There are plenty of ways to increase your credit score, so you’re in good financial condition before you need to take out a personal loan.
Top Tip: you can obtain your free credit report and dig into your credit history on your own — or ask for support from a credit repair company.
Before signing the papers on your shiny new loan, make sure you fully understand the terms of the loan. Know the annual percentage rate (APR) and the total cost you’ll pay for the loan (mentioned above), as well as all of the fees you will or could incur throughout the loan.
You should also know how interest is calculated on the loan. When interest gets compounded, it builds on top of previously existing interest while you work on paying off the loan. It’s typically calculated on either a monthly or daily basis, so making additional or early payments can help reduce this cost.
5. Taking out a personal loan is a short-term solution
The typical length of a personal loan is below seven years. On the one hand, this is good since borrowing money over long periods can be risky. On the other hand, if you plan on borrowing a large sum of money, regular payments for a personal loan may be too hefty. While the typical mortgage is paid off over decades, personal loan terms are typically limited to seven years or less. This can be a good thing because you should never borrow money for longer than you really need to.