Are You Considering A Personal Loan? Here Are Some Important Questions To Ask Yourself First

Personal loans are relatively easy to apply for and get approval.

Lenders are also quick in disbursing the monies and this makes them a “go-to” financing choice when you have a money emergency such as unexpected medical and car repair bills to deal with.

Because the interest charges for personal loans are much lower than credit cards, they are often the choice for big-ticket purchases such as handphones and big household appliances.

However, taking up loans is a pertinent financial decision that needs careful assessment and consideration because it can seriously affect your finances.

Here are some self-assessment questions to ask yourself before applying for a personal loan to give you a better picture of your financial situation and plan on the loan repayments.

Why are you taking the loan?

Understanding the purpose of the loan can help you assess if it is aligned with your financial goals.

Personal loans are versatile, but it’s important to use them wisely. Whether it’s to address medical emergencies, car repairs, or consolidate credit card debt, make sure the loan serves a specific purpose and not for unnecessary expenses.

How much do you need?

Asking yourself this question helps you decide the exact amount of money you need to borrow. Knowing the precise amount prevents you from borrowing more than necessary, which could lead to higher interest payments and potentially put you in a difficult financial situation.

Make a list of the expenses you need to cover with the loan and calculate the precise amount needed to meet those needs.

Let’s say, your car breaks down, and you think it may cost $3,000 to repair. By asking yourself this question, you can pinpoint the repair work needed and the exact costs to get your car back on the road.  Instead of borrowing for the full repair cost, you may have some savings stashed away that can help reduce the loan amount so that you can save some money on interest.

How much time do you need to pay it back?

Personal loans typically come with fixed tenures. This question allows you to assess your repayment ability and select the loan tenure that aligns with your financial situation.

Consider your repayment ability and select a tenure that works best for you.

Longer tenures may lower your monthly payments but could also result in higher overall interest costs. On the other hand, shorter tenures may increase your monthly payments but help you save on interest.

For example, a $10,000 simple interest loan for 24 months at 5% p.a. will cost you $1,000 over 2 years, whereas if the tenure is shortened to 12 months, your interest cost is halved to $500.

How much will you pay in interest and other fees?

By calculating the total interest and fees, you can know the loan’s actual cost.

If you are shopping around for a personal loan, by knowing the exact costs you can compare the different loan offers to help you find the most cost-effective possibility that saves you money and fits your budget.

How much can you realistically pay back each month?

Assessing your monthly budget enables you to figure out the amount you can comfortably allocate towards loan repayment.

You must find a balance between affordable monthly payments and reasonable loan tenure to make sure that you don’t strain your finances and that you can meet all your loan payment obligations.

Suppose you need to borrow $10,000 at 5% p.a. for home repairs. Analysing your monthly budget, you realise that you can comfortably allocate $400 per month for loan repayment. Although you would like to save on interest payments, a one-year loan with a monthly repayment of $850 may be a stretch for your finances. Instead, maybe a two-year loan with a lower monthly payment of $433 is more comfortable for your budget and also to be sure that you don’t fall short in payments.

How do you plan to pay it off?

Having a clear repayment plan is important to avoid any payment delays or defaults. This question can prompt you to think carefully and come up with a plan on how you are going to pay back.  Are you going to reduce your discretionary spending or lead a simpler life by cutting some needs to meet this new monthly payment obligation? Having a clear repayment plan helps you stay organised and avoid late payments, keeping a positive credit history.

Unforeseen circumstances can arise, also have a backup plan to avoid defaulting on loan payments.

Will it affect your credit score?

Taking a personal loan can be good for your credit score if you make timely repayments to prove your creditworthiness. However, if you default or delayed payments it can damage your credit score.

Hence, it is important to plan how much and how long you want to borrow and align your repayment plan with your current financial situation and budget.

What other options are there if I need money urgently?

While personal loans offer quick access to funds, if you cannot afford the loan amount and you need the money urgently, explore other options such as borrowing from family or friends, or negotiating payment plans with creditors that you owe money to.

If you take up a personal loan default on the payments, no matter how small the amount, it will hurt your credit score, hence your financial future.

Don’t roll deep into debt

Every loan that you take on is a huge financial commitment because every month you will have to set aside an amount to repay the loan.

If you fall back on your payments, you’ll risk damaging your credit score which can have repercussions on your future borrowing needs.

That is why you’ll need to carefully consider the cost, affordability and use of the loan. All debts, big and small, have consequences