Things you need to consider before applying for a personal loan
If you’re thinking about applying for a personal loan to get access to the cash you need, there are a few big things you should consider before you begin applying with banks and online lenders. Let’s take a look at them now.
Your Credit Score & History
In most cases, personal loans are unsecured debt. This means that, unlike a mortgage or a car loan, for example, the lender cannot repossess your property to repay the loan if you don’t pay.
This also means that the risk for your lender is higher, compared to those other types of loans. Because of this, you will need very good credit to get the lowest possible interest rate. For those with great credit, you can expect an APR (annual percentage rate) of 5-10%.
If you do not have excellent credit, you may end up paying a 20-30% APR, which is quite high and could make it hard to repay your loan.
Your Overall Financial Situation
It’s a good idea to consider your overall finances before applying for a personal loan. Do you have an emergency fund that can help you cover your expenses, and stay on top of your loan even in the event of job loss?
Do you have a lot of debt? If you do, your debt-to-income ratio (DTI) may be higher, which could make it difficult to qualify for a loan. Take the time to ask yourself these questions about your finances, and make sure that a personal loan is really the right choice for you.
Whether or Not You Really Need A Personal Loan
There are plenty of situations where taking out a personal loan makes sense. For example, you can use a personal loan for debt consolidation – taking out cash to pay down credit cards and repaying the personal loan at a lower interest rate. Over time, this will save you a lot of money.
You could also use a personal loan to start up a business, or to make repairs or renovations to your home before you sell it. These situations are ideal for personal loans.
But you should think twice before you take out personal loans for more frivolous things. Funding a vacation, buying gifts, or purchasing consumer goods with personal loans could put you into debt, and permanently damage your finances.
The Impact of Applying for Loans on Your Credit Score & Creditworthiness
Thinking about getting a new car or applying for a mortgage soon? If so, you may want to think twice about getting a personal loan. Applying for personal loans will result in “hard inquiries” on your credit report, which could (temporarily) lower your credit score, and make it harder to qualify for an auto loan or a mortgage.
Consider waiting until you’ve been approved for your mortgage or auto loan, and then start thinking about whether or not a personal loan makes sense for your financial situation.