There are times when your financial situation will demand that you seek other sources of finance, and you may end up taking out a personal loan. Maybe you need money to solve pressing personal problems, to carry out crucial home repairs, or to settle medical bills not covered by insurance. Whatever the reason for taking out a personal loan, it is best you make sure that a loan is the right route to take.
Different types of personal loans
Personal loans can be either secured loan or unsecured loan. Each one has its pros and cons, and your choice will depend greatly on your ability to meet the loan criteria.
A secured loan is usually backed by some form of guarantee or collateral, so that should you fall to meet your loan obligations, the collateral will become forfeit. Unsecured loans, on the other hand, are loans not secured by any collateral.
Personal loans are usually repaid at a fixed rate and over the agreed-upon period of time; however, because unsecured loans are essentially unsecured, they tend to carry a higher interest rate.
Before taking out a personal loan for any purpose, ask yourself the following questions. The answers you get will determine whether you should proceed or not.
- Will borrowing money help me achieve my goals?
While it is true that taking out a personal loan makes sense under certain circumstances, you have to be certain that borrowing is the right route to solving your financial problems, because if you don’t have a solid plan for your financial future, taking out a loan will only cause you more problems.
Therefore, before taking out a personal loan, take a good look at your finances to determine if it is the right tool for your financial situation.
- How much can I borrow?
The maximum amount of money you can borrow varies from lender to lender and will depend a lot on a wide range of factors, the most important of which is your credit score.
If your loan ceiling is not up to the amount you need, will it make sense to proceed with the loan application?
Having said that, the moment you start considering applying for a personal loan, you should take steps to manage your credit rating so that it doesn’t affect your loan application.
- What will my monthly payment be, and can I afford them?
It is one thing to take out a personal loan but another thing meeting up with your repayment obligations. This is why it is important that you have a clear idea of what your monthly payments will be before proceeding with the loan application.
As already explained in the previous points, there are different factors that will influence your loan application, including the interest rate and monthly repayments; however, you can use an online loan calculator to get an idea of what to expect with your loan application.
- How long can I take to repay my loan?
The term of your loan is something that you will have to agree on with your lender; however, there are a few things you should know about loan terms. For example, the longer your loan term is the smaller your repayments, but the bigger your interest rates. For this reason, when negotiating loan terms, consider how much you will be comfortable paying every month, and use that to determine how long you should apply for.
- How much will I pay for my personal loan in total?
Before signing the dotted lines, you should find out if your loan comes with any hidden fees. Most times, you get what is an obvious good loan offer, not knowing that it comes with a few hidden fees, such as account keeping fees, and even early repayment fee.
Therefore, be sure to ask your lender for a clear description of any associated costs, so that you will know what you are getting into.