Personal loans can be one of the best ways to get money to finance any of your big payments whether it be a new house, a new car or some big renovations. However, when they’re not used smartly, they can lead to tons of debt and huge interest payments that can have serious effects on your financial situation. In this blog, we’ll discuss the 6 things that you should consider before getting a personal loan, starting from comparing different financial institutions to not taking out too many personal loans.
Compare different lenders
While you might feel inclined to go straight to your usual bank and get a personal loan from there, it makes more sense to have a look at different lenders and see which ones are providing the best rates and which ones suit you the best. The AER (annual equivalent rate) generally offers the true cost of a personal loan but you also have to consider additional charges that may be incurred.
One way to make the research for your preferred personal loan lender much easier is just doing it through the internet. You can use comparison tools that will help you compare personal loans from different lenders, in whatever country you’re in. Additionally, you can use a personal loan calculator to help you see exactly what your best options are by entering the amount you want to borrow, the term and the repayment period.
Read the fine print
It’s often very tempting to just skim over the terms and conditions of any agreement, but when it comes to details regarding financial agreements such as personal loans, you really do need to sit down and have a good and comprehensive read of the fine print. You’ll need to check if you actually do meet the requirements that they ask for. This is because some lenders require that you’ll need to contract a checking account, a credit card and other financial products so that you can link with them as much as possible.
The fine print will specify everything you’ll need to know about the personal loan, from the do’s and don’ts of the contract to how everything will work and the legal side of things.
Have a good think about whether getting a personal loan is the right move
If you haven’t signed any forms yet or come to any agreements with lenders, then you’re still able to take a step back and have a good think about whether it makes sense for you to still get a personal loan. Consider the risks involved and analyze them. You should compare the risk to the potential rewards of taking a personal loan and decide whether it’s worth it.
Secured personal loans are generally cheaper than unsecured loans but you still run the risk of losing the guarantee if you are not vigilant with your payments. Because of this, you should avoid taking out a personal loan, unless you’re 100% sure you’ll be able to make your payments back on time, otherwise you’ll run the risk of losing your collateral.
- Do not apply for too many personal loans
This is a mistake that many people make where they apply for many personal loans in the hope that it’ll leave them with multiple offers or deals for them to choose from.
In reality however, you should definitely avoid doing as it can make you look really desperate for money and will leave lenders often being suspicious of your intentions. This is because when you apply for personal loans, it leaves a mark on your credit history and it’ll show all of these financial institutions that you’ve applied for multiple loans elsewhere and it may indicate to them that you’ve been rejected for those loans even if you haven’t.
- Verify your credit rating
Before you go and apply for any personal loans, it’s a good idea to check what your credit rating is like. This is because banks use credit ratings and credit histories (in addition to the purpose of your loan and the amount) to decide whether or not they’ll give you the loan or not and to determine the interest rate you’ll be paying if you are granted the loan. This is because these factors help determine the level of risk that the lender will be taking on by lending you the money. If your credit rating is poor and they do grant you a loan, you’ll likely get much higher interest rates, which you should take into account as this can be a huge chunk of money you’ll have to pay back.
Checking your credit rating prior to applying for a personal loan can also provide a very good opportunity to patch things up if your credit score is poor – by showing a consistent pattern of making repayments for other things on time, thus improving your score.
- Figure out an appropriate repayment schedule
This one depends on your circumstances and what you ultimately prefer, but nevertheless is extremely important. Some people prefer to pay more aggressively, by paying larger amounts over a shorter period, to get it over and done with. This also means that you’ll be paying less interest as well. Others prefer to pay over longer tenures so that they can pay the loan back through smaller, more manageable payments.
They both have their drawbacks however as if you pay over a shorter period of time, the payments are likely to be harder to make and there’s a larger chance that you’ll have to miss one of the payments because they’ll be much higher. On the other hand, paying over a longer period means that you’ll be paying more interest. This is why you should have a good think about what situation suits you best, taking into consideration your financial situation and potential impacts to your credit rating.
Overall these 6 things should always be considered before getting a personal loan, as taking loans out definitely comes with its risks! This way, you’ll ensure that the loan is the right option for you and you’ll be able to be 100% prepared for when you get it.