Getting a Personal Loan? 5 Things You Should Think About First
Are you dreaming of building a house or getting married? A personal loan may be the right solution for you to meet your financial needs.
Applying for a personal loan involves taking a lot of things into important consideration. Before you make this significant decision, here are five things you should think about first to ensure you’re leaning closer to your financial goal.
1. The Purpose of the Loan
Personal loans are quite convenient as the lender does not typically require you to disclose the reason why you’re taking out a loan.
However, there are certain things you shouldn’t consider taking a personal loan out to pay for. These include vacations, gambling, buying a new wardrobe, or any other luxury purchases.
You should prioritize your basic financial needs over more luxurious desires.
Do you meet all the requirements to qualify for a personal loan? Generally, the basic requirements are:
- A regular income
- Being 18 years old or older
- Being a permanent resident of the country
- Having accessible details of your current financial situation
Your credit score is essential
Since applying for a personal loan doesn’t involve collateral, your credit score is crucial in determining your interest rate. If you have good credit, you can expect the lender to lower your interest rate. Make sure you’re in excellent financial shape before taking out a personal loan.
Your source of income, or your job, has a huge impact on your credit score. A career development program can help you advance your vocation and help you get on the path to building wealth so that you won’t have to worry about credit scores in the future.
Other tips to help improve your credit score:
- Set a personal budget and stick to it to minimize expenses
- Repay your debts on time
- Set aside a portion of your take-home pay each month for emergencies
- Monitor your credit
3. Interest Rates
The interest rate is the amount that a bank or a financial institution charges on top of the money you borrowed. Ideally, you should choose a personal loan that will offer you the lowest possible interest rate so that you can concentrate on paying off the money you borrowed instead of the extra interest.
Since personal loans are usually unsecured, they attract high-interest rates. This is because it is not a requirement to keep any assets to serve as collateral.
4. Loan Term
The length of your personal loan will dictate your repayments as well as the amount of interest. The longer the loan term is, the lower your repayments will be. Most personal loans will range from one to seven years.
How are you planning to pay off your loan? Are you going to pay weekly or monthly? By determining your repayment scheme, you can select the right loan and avoid any unnecessary costs. Check your financial situation and find which repayment plan works best for you without too many problems associated with interest rates.
5. Fees and Penalty Charges
In case you aren’t able to pay your obligations on time, there will be a hefty penalty charged on your loan account. Make sure that you know the exact details regarding penalty charges in case you get one in the future. You have to ensure the affordability factor of your personal loan right from the start.
Fees to look out for may include:
- Early exit fee
- Early repayment fee
- Establishment fee
- Service fee
- Withdrawal fees
Take time to consider the fees listed above when deciding on the term and type of loan to get. Doing so lets you avoid any unnecessary expenses down the line.
Is it absolutely necessary?
Only consider getting a personal loan in the context of your overall finances. If possible, don’t aim to get a personal loan just for an impulse buy or without completely understanding your options.
Always consider the big picture when considering how the loan amount will fit in your personal budget. Remember, you’re getting a loan to ease your financial situation, not make it worse. By deliberating over the five things above, you can arm yourself with the necessary knowledge to make the right decision and gain the confidence that you’re on the correct path to reaching your financial dreams.
Deepak Kumar is a Co-Founder of SoulWallet, a neutral comparison portal for consumer financial services. With a team of “out of the box” thinkers and a deep understanding of the UAE consumer banking industry, the company helps customers make the best choices when shopping for financial products such as credit cards and loans.