Is a Personal Loan Right For Me? 3 Questions to Answer Before Taking Out a Personal Loan.
Borrowing money should never be taken lightly, but there are many circumstances where taking out a personal loan makes better sense than trying to save up a large sum of money in advance.
As you may already know if you’ve been doing your research or had other loans or credit cards in the past, once you apply you will get a mark on your credit score, so it’s important to go into any application knowing exactly what you need and afford to pay back each month so you have the best chance of being accepted on the first try.
To help you decide if a personal loan really is right for you, here are 3 questions you should answer and consider before you apply for a personal loan.
1) Do You Have a Good Reason for Borrowing?
Personal loans offer you a lot of freedom; while lenders will ask you what you’re planning on using the money for (and that will have an effect on whether or not they accept you), once you have the money in the bank you are usually free to spend it however you desire. If you know with absolute certainty that you can pay back the loan each month, the reason for borrowing the money won’t really matter, but it is wise to only borrow money when it makes sense to.
For example, seeing something for sale that you’ve not been on the market for, deciding you want it, and getting a personal loan may not be the right decision. But, if you need to buy a new vehicle, have urgent home repairs or improvements to do, want to consolidate credit card debt at a lower interest rate, or want to fund a dream side-hustle or business you know you’ll throw yourself into are all good reasons to take out a loan.
Whether or not a personal loan is right for your circumstances is a very individual decision that you’ll need to make, but if you are making an impulse decision give it a week before you move forward to check that this is the right move.
2) Is a Credit Card or Personal Loan Best?
Once you know your purpose for borrowing money, you may wonder whether a credit card or personal loan is a better way to borrow the money you need. First, answer these questions:
- Would you definitely pay the credit card off each month?
- Do you need to borrow over $1,000?
- Is your credit rating good enough to get a long 0% period on a credit card?
If you aren’t going to set up an automatic payment to take care of credit card debt, a personal loan will be better because it requires you to pay it back month after month. The danger of credit cards is that they are always there when you need them – and you can just pay a minimum on them and let debt rack up until it’s out of control. If you have any outstanding credit card debt now, and still need to borrow, a loan is your best option for not getting into financial difficulty.
If you need to borrow over $1,000, a loan will also likely be your best option. In most cases, when you apply for a credit card you won’t know what your limit and interest rate will be until they’ve accepted you, but with a loan you’ll have a much better idea. If you know you want to borrow $5,000 for a new vehicle, a loan will always be the better choice.
The only exception to choosing a loan over a credit card is if you are borrowing a very small amount, want to keep the credit line open after you’ve paid it off for credit score purposes, or if you can get a long 0% interest period on a card with the right limit.
3) Do You Want a Secured Loan or Unsecured Loan?
A personal loan can be either secured or unsecured. Secured means that you put something you own, such as your home or car, down as collateral. This means that if anything goes wrong and you aren’t able to pay back the loan to a reasonable degree, the lender may take you to court to gain possession of it.
Unsecured means that they are simply choosing to believe that you are going to pay the loan back, and if you don’t they will take you to court to reclaim what you owe. The difference is that, in most cases, they can’t take your possessions from you.
Which is better will be down to your circumstances and how much you want to borrow. If you want to borrow a large sum, say $25,000, lenders are likely going to need you to put down a large asset as collateral. Unsecured loans keep your possessions out of reach, but it doesn’t mean they can’t pursue you if you don’t keep up on your payments. (The moral of the story is whatever you choose, always keep up on your payments and if you get into financial difficulty call them and work with them to find a suitable solution.
Always Do Your Due Diligence
A personal loan can be the answer to many problems, and may be your only real solution if your vehicle dies and you need a way to get to work each day. Once you are sure you want a personal loan, it’s time to look for one. It’s important to do your due diligence and compare companies, interest rates, and terms before applying. This can be a lengthy process, so it’s worth using a comparison service to find the best deal for you and the one you are most likely to be accepted for.
We do just that. If you’re ready to find out what personal loans are available to you, click here.