There’s hardly an adult alive that hasn’t taken out a loan of some kind. The majority of us can’t afford to buy cars, homes, or other big-ticket items out of pocket. Therefore, loans have become a staple in our society.
However, there are certain things to consider before taking out a personal loan, or any loan for that matter. For example, the average Canadian owes $1.78 for every dollar earned. Taking out a loan means adding to your personal debt and committing to the monthly payments.
Therefore, you have to ask yourself some important questions before taking out a personal loan.
What to Ask Before Taking Out a Personal Loan
The key to avoiding unnecessary and exorbitant debt is knowledge. And one doesn’t gain knowledge without being inquisitive.
The world of finances isn’t all that difficult. What is difficult, however, is learning how to manage your money and maintaining the discipline to make good decisions. You can begin learning those skills right here, by learning to ask the right questions.
1. Why Do I Want a Personal Loan?
First and foremost, why are you taking out this loan? There are a handful of good reasons for taking out a personal loan, and a whole host of bad ones.
As mentioned before, the majority of Americans can’t afford big purchases out of pocket, as 44 percent of Canadians are living paycheck to paycheck. Therefore, paying for things like ATVs, Snowmobiles, home improvement projects, and cosmetic surgery must be done through a personal loan, which is okay if you can afford it.
However, personal loans aren’t meant for keeping you afloat if your drowning in bills. While it may be a short term solution, it will only add to your problems. Additionally, financing things like TVs, gaming systems, any of the items listed in the above paragraph may not be a good idea if the monthly payments will put a strain on your finances.
2. How Much Money Should I Ask For?
Next, you need to know how much money you need. For all you know, you won’t be approved for the amount you’re asking for. However, having a predetermined amount is the best place to start when taking out a personal loan.
Then, you can start exploring your options. Just make sure you don’t look down all the avenues, rather than going with the first place that says yes. Hold out for the best interest rates and loan terms.
3. What’s My Credit Score and How Will This Loan Affect It?
When considering taking out a personal loan, check your credit score. While there are plenty of sources that grant loans for people with bad credit, good credit will go a long way towards improving the terms of the loan. For example, good credit will approve you for more money and a lower interest rate.
If your credit score is important to you, you also need to consider how taking out a personal loan will affect your credit report. One thing that lowers a credit score is a high debt to income ratio. However, a personal loan taken out under the right conditions can also improve your credit score in the same way credit cards can.
4. Are There Loan Options for People with Bad Credit?
As mentioned above, there are loan options for people with bad credit. These no credit check loans can be acquired quite quickly (same day, in some cases) with very little prerequisites.
These loans can serve as a giant safety net for people facing financial emergencies such as medical, veterinary, automobile, and home repair issues. However, these loans often need to be paid back expediently to avoid high-interest rates.
5. Can I Afford to Make the Payments?
Next, when taking out a personal loan, figure out your budget in terms of what you can and can’t afford. Take a good, hard look at your finances to see how much room you have for the extra monthly payments a personal loan will require.
However, you don’t want to max out your budget by accepting the largest payment possible. It may mean taking out less money than you originally planned, but you shouldn’t put yourself under financial hardship.
This may also be a good time to look into new ways to manage your budget.
6. What Terms Am I Willing to Accept?
Part of being responsible while taking out a personal loan means knowing when to walk away. Too many people get excited about what they’re taking the loan out for and throw caution to the wind, accepting whatever terms allow them to get financed sooner.
Decide ahead of time what terms you’re willing to accept regarding the loan amount, interest rate, duration of the loan, monthly payments, etc. You can often find better deals by shopping around and finding the best lender.
7. What Are the Different Types of Personal Loans?
Finally, you’ll have several options when taking out a personal loan, depending on your financial and credit positioning.
Secured loans are backed by collateral, often a vehicle or your home. These loans often come with better interest rates and higher loan amounts. Unsecured loans, on the other hand, are riskier for lenders, and therefore come with higher interest rates and typically, lower loan amounts. Unsecured loans way heavily on your credit score.
Debt consolidation loans are great personal loans to help improve your financial situation. They consume your other debt (as much as you get approved for) which gives you one payment and interest rate instead of several. This can really help lower your total monthly bills.
Co-signed loans are available for people with very little or very bad credit. By using a co-signer when taking out a loan, you can get a higher amount and lower interest rates. However, the person who co-signs is equally responsible for the loan, which is why you may have trouble finding a co-signer.
Payday loans are sometimes known as same-day loans. They can be taken out for quick cash but the total payoff is typically due by your next paycheck. These are good “life-saver” loans during a financial emergency but can also lead to more problems.
We can’t always control what comes our way. Sometimes, taking out a personal loan is a great way to finance new things to improve our life. However, they can also be a necessity in the event of a financial crisis.
If you find yourself needing cash, don’t hesitate to reach out to us! We will do everything we can to help you!