Do you have plans of borrowing personal loans? Maybe you’re one of the 30 million unemployed Americans who are “severely cash-strapped.” It’s only logical for some people to apply for a loan to help them make ends meet. This is especially true if they don’t have enough emergency funds.
Personal loans are more accessible for most Americans because it doesn’t require collateral like a house or other valuable assets. It’s also not as high as the interest that you’ll get from using credit cards. So if you think about it, this is the best way to support your current financial situation. Although you are borrowing money, it won’t be too much of a threat to your finances.
Why? Because the interest rate is not too high. Not only that, but it’s also easier to budget around your other monthly expenses. Personal loans have a fixed repayment plan. That means the amount you’ll pay each month will be the same. So you can easily incorporate that in your budget plan.
But before borrowing personal loans, it’s important for you to be certain that this is exactly what you need. While there are many uses for this type of loan, it’s not always the perfect solution for some financial situations.
So how will you know if it’s the right option for you? Start asking questions.
6 questions to ask before you borrow personal loans
There are 6 important questions that you need to ask before borrowing personal loans. Before you start with the questions, make sure the purpose of the loan is clear to you. Is it to pay for debts? Or is it to support your emergency fund? Knowing what it’s going to be used for will help you answer the questions that will lead you to the right personal loan.
How much do you need?
If you know how you’ll use it, this is an easy question to answer. If you’ll use it for your debts, you just have to get the total amount that you need to pay off. That’s the loan amount you have to borrow.
In case you need it for your expenses, calculate the months that you need to fund. Then just use that as your reference on how much you should borrow.
The truth is, it’s not the amount that’s really the issue. What’s important here is that you discipline yourself to borrow only what is needed.
What is the interest rate?
The next question that you need to ask is about the interest rate. As explained, the interest rate will be added to what you will pay. So if you want to save on your debt payments, make sure you get low-interest loans. If you have a good credit score, the chances of getting a low-interest when borrowing personal loans are high. This is really helpful if your reason to get the loan is to consolidate high-interest credit card debt.
What are the payment terms?
The third question that you need to ask is about the payment terms. To start with, ask how much you need to pay each month? It’s also important to ask this so you will know if your current financial position can afford this monthly payment.
You should also read the fine print of the loan application. Know the penalty fees or other charges that you might have to pay. Make sure this loan will not cost you more than it should.
How will I pay this back?
After the payment terms, you should have a general idea of how much you need to pay each month. The next question will now be for you. How will you pay this back? Where will you get the funds? If you’re using the money as a replacement for a lost income because of unemployment, this may be a problem. If you can’t find a way to pay it back, you might make things worse. It might be best to find other means to pay it back. Until you have a plan to repay it, hold off borrowing personal loans for now.
What is my credit score?
You should also ask yourself about your credit score. If you have a bad credit score, you’ll probably be given a higher interest rate. If you can wait, work on improving your credit score first. But if you can’t wait, get the personal loan that offers the lowest interest rate. That way, you won’t have to pay a lot of money on your interest payments.
Is this the only option?
Finally, ask yourself if this is the only option available to you. Don’t settle for the first loan that you will see. You have to find the loan with the lowest interest rate. Look for loans that have the least fees and charges too. Flexible payment terms are also a good feature to have.
Do your research so you’ll know that you’re really getting the right loan that will fit your needs. If you’re using this loan to pay off a debt, you have other debt solutions that you can use. Among your options include debt management, debt settlement, etc. Make sure you really understand what you need so you can make the right choice.
When is it okay to borrow personal loans?
According to reports, the average rate for a 3-year loan is 9.37%. It may not be as big as the interest rate that you’ll get from your credit cards. But this is still a huge interest to pay. So if you don’t have a real need to borrow a personal loan, you don’t have to borrow anything.
But how will you know when it’s okay to borrow this loan? There are three situations that will make this okay.
To consolidate debts
If you have high-interest rate debts like your credit card balance, this is a great option to pay it off and save at the same time. The savings will be evident in the overall interest payment that you will make on that debt. So if you have a good credit score and you can guarantee that you’ll get a low-interest on your loan, then use this to consolidate your high-interest debts.
To add value to your home
Borrowing personal loans to add value to your house is also a good idea. But only if this is your own property. The reason why this is beneficial is that any improvement in your house would mean a higher net worth for you. The property itself will really increase in value over time. But if you improve it’s structure or make it more visually appealing, it will make that increase go even higher.
To pay for large purchases
Finally, you can use personal loans for large purchases. Instead of using credit cards, you may want to consider this. It has a lower interest rate and easier to budget in your expenses because you’ll be paying a fixed amount. Just make sure that this is a purchase that you really need.