Each major item you possess – a house or a car, for instance, you may have obtained it with a loan. So what if you need to borrow a lump sum of money for something other than purchasing real estate or a vehicle? The answer may be a personal loan. A personal loan is just what its name implies – a certain amount of money you borrow for personal reasons. These reasons may include anything from renovating a home, making a major purchase, paying for a vacation, or consolidating existing debts. And what makes it attractive is the fact that it does not require a collateral or a guarantor in most cases.
To apply or not to apply
Getting personal loan may be easy. But, if you are not careful, you may end up being in worse financial situation than before. So, before taking out any personal loan, make sure you have good enough reasons to do so. These reasons may include:
- The item which you buy from the loan is a “finite” purchase, that is, you will not need to spend more money on it after it has been bought.
- You do not want to saddle yourself with a much longer-term debt, such as home refinancing, to pay for what you want.
- You are waiting for a payment, perhaps from the sale of another property. So, the money acts as “bridging loan” before you get the proceeds from sale.
- You want to do debt consolidation by taking out new loan to pay off all the other debts you have.
Reasons which do not justify taking out a personal loan may include:
- Personal loan is the last resort, after you have maxed out your credit cards and used up the overdrafts.
- You want to make a spur-of-the-moment purchase which you cannot afford.
- You want to consolidate debts but do not want to change your attitude on budgeting thereafter.
- You have just received an offer for a personal loan which you cannot resist.
Once you decide that a personal loan is required with a good reason, then you can decide where to apply.
Tips on looking for the suitable loan
There are basic rules which you must always follow when looking for a personal loan. The rules are:
- Shop Around
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- Compare the Annual Percentage Rate (APR) – The APR tells you the interest rate you will be paying yearly. It is the best way to compare loans because it provides you with an accurate picture of what the loan will actually cost.
- Check the repayment period – While your monthly payments for a five-year personal loan may be cheaper than for a three-year one, you will still end up paying more in the end even if the interest rate is lower.
- Always ask about other fees which may affect the total amount of the loan – These fees may include charges for late payments or early repayment penalties. Banks are known for charging fees on everything, and late payments are no exception. Make sure that you know exactly when the payments are due and when late fees will begin to accrue so you can plan accordingly. Early repayment penalties are often charged by banks when you pay off a loan early which means that you are reducing the amount of interest the bank earns on your debt.
- Try not to take out long-term loans – If possible, avoid taking out long-term loan for periods of, say, seven years. This is because you cannot predict your financial situation over that length of time. Furthermore, the interest payments may add up to be as much as the cost of the loan itself.
Is personal loan the best option?
A personal loan can be the answer when unexpected expenses crop up. In many cases, however, taking out such a loan may not be the best solution. You need to carefully weigh the costs of taking on more debts with the benefits of receiving more funds from a personal loan. In fact, before you decide to pursue a personal loan, you should consider checking out some alternatives such as using your savings or borrowing from family and friends.
However, the best option is to put off the purchase. Unless you need a personal loan for an emergency expense, chances are that you can delay the purchase until you have saved up enough cash for your purchase.
