Maybe you’re planning a big event, can’t wait to buy something expensive, or you just need some help with the cost of living. There are all kinds of instances where people need a personal loan. Like a lot of us, you may hate the idea of borrowing. There are obvious risks involved, so it’s important to go about it the right way. Here are a few important questions to ask before applying for a personal loan.
First of all, how good is your credit score? Credit scores have become more and more relevant over the past decade. Understanding the impact of yours is very important. If you’ve got a great history and score, then the interest rate on your loan will be more favourable.
Lenders will use your credit score as a way of judging your reliability, and setting the terms of your loan. If your credit score isn’t too great, then your interest rate is going to be higher. There are things you can do to improve your credit score, but it all takes time. If yours is really poor, then you may want to step back and consider how important the loan is. Holding off a little is often the best course of action.
The next big thing to consider is whether you’re going to apply for a secured or unsecured loan. If you choose an unsecured loan, then you won’t need to put any collateral at risk. This means that there’s more risk for the lender, and you’ll probably be dealing with a higher interest rate. Secured loans, sometimes referred to as homeowner loans, require you to put down some collateral.
This will mitigate the cost of interest on the loan. The collateral will be your most valuable asset, which for most people will be their house. Of course, you should be aware that if you don’t keep up with the agreed payments, you could lose your house to the bank. Choosing the right kind of loan for you takes some careful study of your personal finances, so take your time.
The payment period you’re looking at is another important thing you need to factor in. This will have a direct effect on the amount of money you pay overall. If the monthly payments are lower, then the payment period will be longer. Don’t get taken in by the monthly repayments in big, showy letters.
Paying interest for an extended period of time could translate into a higher overall interest rate. Sometimes it’s worth reducing your monthly repayments for a higher overall rate, sometimes not. I advise you to figure out a maximum amount of repayments which you’d be happy to pay. This way, you can draw a line in the sand when you’re looking at loans, and avoid the risk of your interest rate piling up. Having some strong base terms is generally a good idea whenever you need to borrow.
I hope this has made the whole subject of personal loans a lot clearer. Take your time with these questions, and you’ll find the one that’s best for you.