A loan is a form of debt, and you ideally would not want to have debt. However, there are times when taking out a loan makes perfect sense. A personal loan can help you finance a big and important purchase or even help you save money. No matter your purpose for taking out a loan, it’s important to understand what you’re getting into and how you can do it right.
When should you consider a personal loan?
Taking out a loan is a big decision. You’re entering into an agreement with a lender and you’re expected to keep your end of the bargain. Failure to do so can decrease your credit score and worsen your financial problems. That being said, below are situations where a personal loan is a good consideration.
You need to consolidate debt - this is among the most common reasons why people take out a personal loan. If you owe a sizeable amount on one or multiple credit cards with high-interest rates, using a loan to pay them off can save you money.
It will help you make money - a personal loan makes sense if you will use the money to make more money. For instance, you might be looking to start an online store or any business venture, remodel a home to boost its market value, or enroll yourself in a class to upskill yourself.
You have emergency expenses - you should have emergency funds to cover unforeseen expenses, but if it’s insufficient, taking out a personal loan is a good way to avoid the consequences of not paying.
Steps in taking out a loan
1.Get all required documents and information
Gather the information below before you start your loan application.
Personal identification (driver’s license, Social Security card, passport)
Proof of income (W-2s, paystubs, filed tax returns)
Employer’s information (company name, manager’s name, and phone number)
Proof of residence (utility bill with your name and address, lease agreement)
2.Do the calculations
You don’t want to take out a loan only to find out later that you won’t be able to pay it on time or pay it at all. Lenders will do what they can to determine whether you’re capable of paying the amount you want to borrow, but you still should run the numbers yourself to avoid trouble down the road. Calculate the exact amount you need, and consider providing an allowance in case your lender charges an origination fee.
3.Check your credit score
Lenders run a credit check to determine if you’re capable of repaying your loan and use that information to decide whether to approve your loan or not. If you don’t want to end up clueless as to why your loan application got denied or avoid an embarrassing moment at the bank, check your credit score first. If you have a good rating, you can negotiate for better interest rates.
4.Assess your options
You shouldn’t just go to the nearest bank and sign the documents. Consider all your options so you can get the best deal possible. You want to consider if you can get a co-signer for a decent interest rate. If you have collateral, you can also opt for a secured loan, which offers more favorable terms. Lastly, decide whether to go to a traditional bank or online lenders. The latter will be more lenient in approving loans.
5.Choose a loan type
What kind of loan best suits your situation? There are lenders who are flexible in approving loans regardless of purpose but some lenders won’t approve loans if the money will be used for specific purposes. For instance, one lender might be willing to lend you money to start a business, and another might outright reject your application.
6.Hunt for the best loan rates
There are many lenders out there, and they offer different interest rates. Make sure you don’t settle for the first lender and hunt down the best possible deal you can get. Personal loans are often offered by traditional banks, credit unions, and online lenders. Determine if a lender offers a prequalification process as this can help you get a better grasp of the rates you can avail of.
7.Choose a lender and apply
Start the application process once you’ve decided on a lender. Depending on your choice, the entire process can take place online or require you to visit a physical bank or establishment. Make sure you have all the information and prepare all the documents you will need. Be also prepared to provide any additional documents the lender will require.
8.Accept the loan and begin repaying
You’ll need to finalize the documents and accept the terms once your loan is approved. Depending on your lender of choice, you can get the money within a week or just in a few days. It’s advisable to keep track of your dues and set up automatic payments to ensure you won’t get a penalty for late fees. If you get a windfall financially, consider making advanced payments so you’ll have an allowance for emergencies.
Taking out a loan is a big financial decision that requires a lot of thought and preparation. If you do your due diligence, a personal loan is an extremely valuable tool that can bring you closer to your financial goals.