When you need money for personal reasons and don’t have sufficient funds in the bank, your best option is to apply for a personal loan from reputed lenders. However, deciding on a loan can be a confusing task given the plethora of choices in the market where every lender will be competing with each other to nab you as their client. To make things easier for you, we look at seven tips you need to keep in mind when choosing a personal loan.
Amount Of Loan
You need to carefully consider the amount of loan to apply for. Ideally, you should only take a loan depending on how much money you need. Some people may go overboard and apply for a higher loan amount on the basis of their income. And this can eventually backfire badly. For example, if you have a monthly income of $2,000 and you need only $100,000 as loan for personal purposes, then you must only apply for a loan of $100,000. Just because you can get a loan of $250,000 does not mean that you should apply for such a big amount. If you do, then you will have to pay a higher amount as monthly repayment which can put a strain on your budget. And if your income were ever to drop for some reason in the future, you will have a difficult time repaying the loan.
Fixed Vs. Variable Rates
Another important thing to consider is the interest rates of the loan. In this regard, you will have two options – fixed or variable rates. If you opt for the fixed rate loan, you will be charged a fixed interest rate throughout the loan term. In contrast, if you were to choose a variable loan, the interest rate will change throughout the period of the loan. As a result, you will be paying a higher or lower interest depending on the condition of the market.
A factor that will play a crucial role in determining the interest rate of your personal loan will be your credit score. In case you have a weak credit score, you will have to pay a higher interest rate. But if your credit score is high enough, you can get a loan for lower interest rates. As such, it is recommended that you avoid applying for a loan in case you have bad credit. Instead, work to repair your credit and get to a good score. Only then should you apply for the loan since you will only have to pay a lower interest.
Check Out Multiple Lenders
Some people tend to approach just a single lender when looking for a loan. This is a bad tactic. Different lenders will offer different terms and rates depending on how they quantify your financial position. By checking out multiple lenders, you can compare personal loans and choose those that offer you the best deal. In contrast, if you only focus on a single lender, you will have to agree to their terms.
Be sure to read through the fine print of the loan and understand all the terms and conditions mentioned in it. It is possible that some of the conditions in the fine print may not be in your favor. As such, if you sign the loan agreement without properly going through the terms and conditions, you might be trapped in a loan that will strain your finances for a long period of time.
Remember to check whether the lender charges any origination fees or not. Some lenders tend to charge an extra fee on the loan. And even if they do provide lower interest rates, the overall cost of the loan can be on the higher side when you take the origination fee into consideration. So, don’t just blindly select a loan based on its interest rate alone. Instead, combine and compare the interest rate and origination fee to get a better idea of the repayment you have to make.
Credit Card Consolidation
When faced with multiple credit card debt, many people opt to take a personal loan to pay off these existing debts. As a result, they will only have to deal with a single debt, which makes budgeting and tracking expenses easier to manage. However, be sure to see to it that you never face any more additional credit card debt after you have paid them all through a personal loan. Some people tend to do just this and end up with the burden of paying off a higher debt.