5 Crucial Considerations Before You Apply for a Personal Loan
A personal loan can be good for you if you need a good amount of cash in less time for certain necessities. However, there are certain factors to consider before applying for a personal loan.
1. Do You Really Need a Loan
The question may seem unnecessary to some of you, as you have already decided to take a personal loan, but think again, do you really need to take this loan? Will borrowing money help you achieve your goal? Is it really worth what you are taking a loan for? For instance, if you are taking a loan for holidays, you can instead open a targeted savings account and wait for a while.
Most importantly, before applying for a personal loan, you have to determine your financial situation and assess how and when you will be able to repay the debt.
2. How Much to Borrow
Before you look at how much personal loan you can get, determine how much you actually need to apply for. If you are applying for a personal loan to consolidate your debt, simply add all your debts to come up with a loan amount. If you are taking a loan for a certain project, list down the potential costs to get an estimate.
3. Secured and Unsecured Loans
Before you apply for a personal loan,you should know that there are two types of loans. One is secured, and the other is unsecured. A secured loan is connected to collateral like your savings account, car, home, or any personal asset. This gives your lender the right to claim your money or asset if you fail to repay the loan.
On the other hand, the unsecured loans are not attached to any collateral; thus, they are not secured. If you default on your loan, the lender cannot take your property. This type of loan typically includes credit card loans or student loans. The lender usually decides whether you qualify for an unsecured loan or a secured one.
4. Other Lending Options
Before applying for a personal loan online or in-person, searching for other lending options might be in your best interest. The other options can be more convenient with low personal loan interest rates and boundings for you. If you have good credit, you can get qualified for a balance transfer credit card. If you think you can pay off the credit card bill before the interest goes up, a balance transfer credit card for a loan can be a better option.
If you are a homeowner, you may opt for a home equity loan called HELS or line of credit known as HELOCs. These loans can finance your need for a larger loan at lower rates. HELs are generally small installment loans, mainly for house owners, whereas HELOCs are more of revolving credit.
5. Impact of Personal Loan on Credit Scores
Many people have concerns over the impact of personal loan on their credit score. Taking out a personal loan does reduce a few points from your credit score. This happens when the lender pulls your credit during the application process of the loan.
This is known as hard inquiry, which stays on your credit reports for about two years. Some lenders will do soft pulls on the credit report that do not affect or have very little impact on the credit scores. So, consider getting a loan from such lenders.
Applying for a personal loan is a highly personal decision. Sometimes, you do not have any option other than taking out a personal loan, so the considerations mentioned above should help. And do not forget to read the fine prints of terms and conditions before you agree to get the loan.