These days, you can take out a personal loan for just about anything.
They quite affordable and convenient compared to other types of lending deals. Yet, there are right and wrong reasons to go down this path and a wide array of aspects to weigh.
First off, borrowing money is always a big commitment. There’s no need to take more than you need or overpay in interest rates. This is just a glimpse of all the debt traps that dot the road to financial stability.
Of course, the million-dollar question is: should I get a personal loan? Well, we should break it to you that the answer isn’t cut and dried.
It all depends on your personal situation and financial logic behind borrowing. That being said, you can rely on some surefire steps to achieve your goals without breaking the bank.
Here is how to make a well-informed decision and mitigate the risks.
1. Get Educated on Personal Loans
The first thing to do is get familiar with how this financial instrument works.
Essentially, personal loans are a type of installment loans. They have low interest rates and involve relatively small amounts of money.
These qualities make them one of the fastest-growing loan products in the market. You could say they’re the next best thing after having savings piled up. However, borrowing in this way is far from a no-brainer.
Rule number one is you should work out how much debt you can afford to take on. Biting off more than one can chew is one of the most common mistakes people make.
Furthermore, notice there are two main variations of personal loans— unsecured (most common) and secured loans. The difference is whether they are backed by collateral or not.
In both scenarios, you borrow a fixed amount and pay it off over the lifespan of the loan. Upon paying it in full, your case is closed. And if things go south at any point, you have a lot to lose, even your property.
2. Prequalify for a Loan
Prequalifying for a loan gives you a clear idea on what to expect.
In other words, it’s a nice way to test the waters before diving in. You can accurately estimate the amounts, monthly payments, and interest rates.
In the process of doing so, you’re required to provide certain information. The list includes your personal details, social security number, debt obligations, income, and place of work.
Common reasons for denying debt are a poor income level and high debt-to-income ratio. Also, most lenders aren’t comfortable borrowing money to applicants with little-to-no work experience.
Along the similar lines, it’s preferable to have fewer recent credit score inquiries. Lenders perceive these spikes in application activity as red flags.
3. Pick the Lender Wisely
It goes without saying you should do your research before taking the plunge.
Its most important aspect is the hunt for the best deals around. Here, local banks (including community ones) are still a go-to source.
But, with the financial sector evolving faster than ever, they no longer pose the only game in town. You can also opt for consumer finance organizations, credit unions, and online lenders.
Credit unions have favorable rates and payment terms for applicants with bad credit. Peer-to-peer lending is a new and quick borrowing lane, which has been rising in popularity as of lately.
Whenever considering an internet provider, however, you must confirm its legitimacy and credibility. One of the ways to do is to contact the Customer Financial Protection Bureau.
They can help you steer clear of predatory and shady lenders such as loan sharks.
4. Mind the Rates and Fees
Interest rates and other fees are vital components that determine how much you will pay in total.
The tricky thing is interest rates vary widely, usually falling into the 5% to 35% range. Three factors influencing the variance are your credit score, length of the loan term, and lender class.
The good news is you don’t have to do the math yourself. It’s possible to utilize various online calculators to figure out exact estimated rates. Ballpark figures just don’t cut it.
Additional fees aren’t to be overlooked either, as they effectively hike the rates. Take the example of origination fees— the amount that lender charges for loan processing.
Moreover, prepayment penalties refer to fees imposed in cases of early debt clearing. Using them, lenders compensate for missed interest rate profits.
5. Leverage Your Credit Score
Only the qualified applicants can take a loan, but the conditions for them aren’t created equal.
Namely, a credit score profoundly impacts the application process. The better it is the lower your interest rate will be. Depending on this factor, you can also borrow anywhere from $1,500 to $100,000.
The takeaway is clear: you want to assess your credit score ahead of time. The fastest way to do it is to ask for a free credit report. Then, if needed, you can employ tricks for improving your score.
Another thing to keep in mind is personal loans affect your score in their own right. This is due to lenders’ hard inquiry, which typically lowers the score by a few points. The effects stick for around two years.
If you apply for a new loan during this period, lenders review your score (soft inquiry). This action doesn’t impact your credit score in any way.
6. Explore Options Beyond Personal Loans
The next step revolves around comparing personal loans to other available options.
To illustrate the point, we will take into account unsecured loans. At the end of the application process, the lender makes a call based on your financial history. If you have a bad score, you’re unable to secure a loan.
On the other hand, having a great score gives you what you want. Alas, the truth is you might be better off applying for a different kind of loan.
For example, balance transfer credit card loans come with 0% introductory APR. They are a sound choice for people with good credit, who are confident they can pay them off in time.
Similarly, homeowners looking to sell property should ponder home equity loans and lines of credit. As types of revolving credit, they offer large sums at low interest rates. The only drawback is that your home becomes collateral.
So, the lesson to draw is: personal loans can be a suboptimal choice in certain scenarios.
7. Think in Terms of Debt Consolidation
So, what are the situations in which personal loans make total sense?
Well, debt consolidation is one of the main perks associated with personal loans. The basic idea is to get rid of the loan at a lower interest rate. The original loan is usually a credit card debt or some other high-interest rate loan.
Personal loan arrangements let you to pay only once a month and save money on interest rates. Naturally, the saved amount should exceed any fees and rates you need to cover over time.
Another benefit is there’s a set timeframe for eliminating your debt. You gain a sense of perspective and urgency. Similar rules apply when you need to tackle any emergency expense you don’t have a fund for.
Ideally, you’re able to clear the total amount of debt/burden you have with a personal loan.
8. You Can Borrow Money to Make Money
Getting a loan isn’t just about plugging financial holes and warding off bigger woes.
It can enable you to generate profit and in multiple ways too. For instance, let’s say you want to fuel business expansion and growth.
In this case, borrowing can pay immense dividends over the long haul. The prerequisite is you do the math and employ a rock-solid scaling strategy.
Secondly, some people take personal loans to finance a home remodel. They focus on improvements that increase the resale value (asking price) of the property.
Finally, you could enroll in a credible course to supercharge your career. It’s a calculated risk, but one that makes a valid case for borrowing.
9. Remember: The Devil Is in the Detail
Once you select the desired option, take a deep breath.
Inspect the contract and go through the fine print. There are several key elements to keep a close eye on. We’re talking about payment penalties, APR surprises, automatic withdrawals, and flexible payment features.
APR surprises pertain to unclear or nonexistent specifications of total debt costs. Automatic withdrawals are a neat feature, but also a potential risk. You want to have low balance alerts to avoid unnecessary overdraft fees.
Lastly, flexible payment features save the day when you encounter hardships. Lenders that offer them forgive occasional late payments or even enable you to skip them altogether.
In any event, you should take your time to review the features. Accept nothing short of full disclosure.
10. Handle the Final Approval with Care
Following the previous steps, you’re closing on the finish line.
All that is left is to sort out the final approval, which is to say complete your formal application. To make it happen, collect your identification, validation of address, and proofs of income.
The first two are rather self-explanatory. As for proofs of income, they come in multiple forms. These are W-2 forms, bank statements, tax returns, or pay stubs.
Once you hand over the documentation, the lender runs the aforementioned credit check. Assuming everything goes right, you receive the designated amount under terms you agreed on.
Using this credit responsibly, you can get your financial house in order and achieve peace of mind.
Should I Get a Personal Loan: Reaching the Verdict
If you’re still left with the dilemma “should I get a personal loan”, fret not.
Taking on new debt is a decision you need to approach seriously. Rushing it isn’t the way to go, even when the deal is as tempting as it gets.
After all, personal loans, although linked to many benefits, aren’t a one-size-fits-all solution.
You need to make sure you’re borrowing for all the right reasons. Evaluate your financial situation and creditworthiness. Check out payment terms, fees, features, and interest rates.
Calculate the total amount of debt you’ll have to pay and choose a lender that matches your needs.
Feel free to visit our learning center for more insights and advice. We can help you boost your long-term financial health.
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