A personal loan can help you get out of financial emergencies. There is no restriction on how it can be used. So, you can use it for anything, such as medical bills, minor repairs, renovations, wedding arrangements, etc.
A personal loan comes with a higher interest rate than a conventional loan. Despite its clear terms and a certain level of freedom, there have been cases where people who took out this loan ended up misusing it.
You are probably wondering whether a personal loan is suited to your situation. Well, depending on the amount you plan to apply for, a lender might ask for collateral.
A personal loan usually ranges between $2,000 and $10,000. Larger amounts are unsecured options and have high-interest rates. Hence, you must be sure you will pay the amount within the period. No matter what your reasons for getting a personal loan are before you submit your application form, here are three questions to ask yourself:
How Much Can I Afford?
Let’s say you borrow $10,000 for a small house renovation. You will have to make large monthly payments to repay the loan based on the APR the lender quotes.
You look at your finances and find out that you won’t be able to keep up with your other expenses with the estimated monthly payment. So, you need to reevaluate the loan amount. It could mean saving for a few months or doing a side job to lower the loan amount you need to borrow.
How Much Can I Pay In Interest?
Your credit score plays an important role in your loan application. The lower your credit score, the higher the interest rate will be, and vice versa. Personal loan interest rates start at 3.49% and go all the way up to 29.99%.
A recent US Federal Reserve System report shows that the average APR on a personal loan for 24 months is 9.39%. This fixed rate means your monthly payments will remain the same.
Once the lender has quoted the interest rate, you must decide on the repayment period. Remember, the more time you take to repay the loan, the more you will pay interest.
Does My Credit Score Allow Me To Take Out A Personal Loan?
As we mentioned earlier, your credit score decides how low or high an interest rate you will get. If you have defaulted on a loan in the past, have outstanding debts, and your credit history shows that you are irresponsible with your finances, chances are that you will get a high-interest rate.
Get your credit report online and wait a couple of months to improve your credit score before applying for the loan. You will have to put the repairs or whatever you plan to do with the money on hold. It’s better to be safe than sorry.
So, there you have it — the top three things you need to consider before taking out a loan is how much you can afford. Whether you can make the monthly payments and if your credit score allows you to go ahead with your decision.
Never make a rushed decision when applying for a loan. Take a week to consider alternatives and if a personal loan presents itself as the best option, only then go for it.