A personal loan can be a very effective way of maintaining your cash flow and can help bridge the gap between your income and large purchases. However, a loan creates an obligation which requires planning and commitment. With the right strategy, it can be a viable option to enable you to make larger purchases, to help in a pinch, or to consolidate debt on higher interest credit cards. Here are the seven great questions to ask yourself before you take out a personal loan.
What is this personal loan for?
This is probably the most important question to start with. Understanding exactly what you intend to use the loan for can help aid in properly managing your spending. Think carefully and write down exactly what you intend to do with the loan. A new vehicle? Business venture? Home renovations? Education and training? Consolidating debt? Is the purchase essential at this stage of your life? Will it provide a return on investment and/or improve your current life situation? Ensure that this investment is really worth the commitment to a loan.
Is this worth the investment?
So how do you know something is worth the investment? Can you make do without it? Is it something that is needed? Have you been considering the purchase or investment for some time? If you have found yourself looking and considering various options available, chances are this large purchase is something you need in your life. Something to also consider is the timing. Can you wait until a change in the market to make this purchase? Conversely, if it is a loan intended to consolidate existing debt, thus possibly reducing monthly payments along with interest paid overall, will the loan truly help with your financial situation in the short or long term? Ultimately, you need to decide if this is the smartest decision you can make.
How much money do I need?
Calculating your costs and knowing how much of a loan you will need can save you a headache down the road. Budget out the total cost of your investment/purchase and leave yourself a buffer for incidentals. As an example, the car you are thinking of buying may be $20,000, but you also need to factor in taxes, registration, and other fees as well. Write down the details and add it up carefully. This will help you make an informed decision when it comes time to take out a loan.
Do I have enough cash flow to support monthly payments?
Equally as important as budgeting out the total loan you want, is budgeting the cost of monthly loan payments. Do you have enough cash flow in the foreseeable future to make this commitment? Know all your potential costs and be confident in what you can comfortably afford as a monthly payment. Being able to afford the requisite monthly payments on time is also key to your decision.
How long will it take me to repay a personal loan?
Understanding how long you will be committed to a loan payment is extremely important. Loans may take you years to pay off, with ongoing and accruing interest; you want to ensure you will be able to fulfill your end of the commitment in an efficient manner within the terms of the loan contract. Payments need to be made on time as specified in your loan agreement.
It is important to remember that you will be paying interest on this loan, and there are more costs to repay than your total borrowed. Making an informed decision and speaking with a representative that you trust is important. The terms of the loan, such as payment dates, timing, and interest amount, can vary; you need to understand this and ensure it fits within your ability to repay.
Are there flexible payment options?
The majority of loans offer a flexible method of payment and terms. It is important for you as a consumer to understand that you have options. Think about how much you can truly afford to pay per month along with payment timing. For instance, if your income is received only once a month, you may wish to have your loan payments due shortly after this date. Some loan options may not fit with your requirements and that’s okay! This is not the end, take your time and find the one that works for you. Sources for loans are varied and can range from chartered banks, community credit unions, financing organizations, and even private investors.
If you find yourself in a position of poor credit, there are still options for you. Furthermore, meeting the contractual obligations of your loan agreement can assist your credit rating and, as it improves, your ability to borrow funds can also increase.
Is this the best type of loan for my needs?
With lots of options for a loan, it is important to determine if you have found the right one to suit your needs. Consider your answers to all the questions above and make an informed decision. The worst thing you can do is commit yourself to deeper debt. Have a conversation with a representative of the lending institution or business offering the loan; be sure you fully understand their terms and conditions.
It may also be worthwhile to consider meeting with an independent financial advisor to provide additional insight regarding options available and what may be best for you. The better informed you become regarding options available, the easier it becomes to make a well-informed and realistic decision. Ask a lot of questions; it is essential that you fully understand the contractual requirements of the loan you are considering. It has to work for you and your lifestyle.
Ultimately, the decision is yours. Speak with one of our LendingArch representatives to learn more about what will work best for you.