A lot of people wonder if getting a personal loan is a good idea. A personal loan can fill a void in your budget and help you break a large expense into more manageable monthly payments. It can also help you cover unexpected expenses, like home repairs or other improvements, or consolidate high-interest debt. The reality is – life costs money. A personal loan is a big decision to make and can seem scary, so that’s why we are here to help! Here are a few questions to help make your decision a little easier and determine if a personal loan is a good fit for you right now.
1. How’s my credit?
Lenders will use your credit score to determine your reliability as a borrower. Minimum credit score requirements vary across lenders. The higher your credit score, the more likely you are to get approved for a personal loan.
However, your current credit score isn't the only thing that matters. A personal loan will affect your credit score in several ways. If you aren’t consolidating other debt together like credit cards or student loans, you may take a hit in your overall credit rating in the short term because you'll have acquired additional debt. This may also limit your ability to take on more debt in the future until you have paid back or at least paid down the personal loan.
But there is a silver lining: paying off the loan in a timely manner and showing that you are a responsible borrower will build your score back up and even help to improve it over time.
2. How are my current finances?
In other words, are you able to afford the monthly loan payments? A mistake many borrowers make is looking at the overall loan amount and comparing it to their annual income. Looking at loans this way will give you a narrow view of your current financial situation. Instead, you should consider your monthly income, the debt you already have, and what you have in savings. This will help you determine how much you can afford to take on from a monthly perspective vs. looking at only the total borrowed.
You should also take a close look at your overall monthly expenses and budget. You should never take on more debt than you can afford because this will severely impact your overall financial health and may negatively impact your credit score if you cannot make at least the minimum payments on time every month. A good rule of thumb is to ensure that no more than 36% of your monthly income goes toward your monthly debt. It is important to understand the amount of money remaining to cover other expenses such as food, gas and entertainment that are not in your monthly loan payments.
3. What is the loan for?
Personal loans are pretty versatile and can be used for a range of reasons, including:
- Debt consolidation
- Home repairs
- Repaying debts to family or friends
- Funeral costs
- Holiday expenses
Remember, there is good debt as well as bad debt. But what counts as “bad debt” differs from one individual to another. Taking the time to inform yourself on the difference is important and a crucial step in deciding on a loan. Reviewing if the purchase is a necessity or a nice to have is important when evaluating any purchase.
4. What other loan options are available?
Depending on what you need the loan for, certain lending options may work better for your situation than others.
For example, if you need cash to cover funeral or medical expenses and feel confident that you can pay back the total amount you need in a couple of months, then a credit card would likely be a better option. If you require money for something more expensive like home renovations where the total cost may be unpredictable, a personal line of credit might be a more flexible option.
For these reasons, it’s always a good idea to discuss your options with a lender so you can make the best possible decision for your finances. Other loan options that you might also consider include:
5. What kind of personal loan do you need?
Most personal loans are unsecured, meaning you probably won’t have to provide collateral to get approved. However, personal loans tend to carry higher interest rates than secured loans because the lender takes on more risk without collateral leverage.
You should always investigate the type of loan you are signing up for. Some types of loans terms to look out for include:
- Fixed-rate personal loans – this type of loan keeps the interest rate the same for the life of the loan along with the same monthly payment.
- Adjustable-rate personal loans – with this type of loan, the interest rate is subject to change over time. If you know, you won’t be able to pay back the total amount borrowed before the interest rate changes, this may not be the best type of loan for you.
6. What are the terms of the loan?
Overall, you should aim to get a personal loan with the friendliest terms possible. You should always look out for things like the repayment period, interest rate, loan fees, and loan processing time. It’s always a good idea to shop around and find a lender who will give you the best interest rate available and the best loan terms you can find as well as the monthly savings.
If you have questions about whether or not a personal loan is right for your current situation, our lending team is always here to help you answer the important questions and address any concerns you may have.