Last updated on March 31st, 2020 at 03:51 pm
Whether your home requires urgent improvements or your business needs an input of cash, taking out a personal loan is often the ideal solution.
However, before you rush into borrowing money, you should consider a number of factors first.
Alternatives to Personal Loans
Before you apply for a personal loan, you should examine your budget and see whether there are other ways to raise that extra cash. For example, by working overtime, taking on a second part-time job, etc.
Alternatively, you might be able to come up with ways to economize on your personal and/or business expenditure. A money magazine has plenty of ideas on how you could accomplish the latter.
When you are positive that borrowing is your only solution, you should compare the terms and conditions of a personal loan to other financial products on the market. In some circumstances, paying by credit card or applying for an overdraft might be a much better solution. You should weigh up all the pros and cons of each type of borrowing.
Calculating the Loan Amount
You must be accurate as possible when you work out how much you need to borrow and equally importantly, how much you can afford to borrow. This requires working out a budget to make sure you borrow the right amount.
If it is too small, it might exacerbate – rather than improve – your financial situation. On the other hand, if it is too much, the temptation might be to spend it simply because the money is available. Borrowing too much will also mean paying back more money overall when you factor in the interest rate.
At this stage, you should also consider the loan term as this plays a key role in the affordability of your loan and how much the monthly repayments will be.
Secured or Unsecured Personal Loan – Which is Best?
Both secured and unsecured loans have their benefits and drawbacks. The key difference is that with a secured loan, you put up some collateral as security for the lender such as property.
This means that you represent less of a risk so the lender will be therefore willing to lend you more and/or at a much more favorable interest rate. The downside, however, is that if you default on your loan, there is action your creditors can take to recoup their potential losses. This might include the repossession of your property.
Also Read: 7 Tips When Applying for A Personal Loan
Comparing the Personal Loans Market
There are many financial institutions which offer personal loans – both from brick-and-mortar stores and online. The sheer choice can sometimes make it difficult to choose the best lender.
You could use the services of an authorized professional broker or you could check out the personal loan market yourself. Using at least 2/3 different online price comparison sites is a good place to start your research.
When comparing different lenders, it is crucial that you check the size of the APR rather than just the interest rate. This is because the APR gives you valuable insight into the overall cost of your borrowing including fees, additional costs, etc.
When conducting research, don’t forget to read the lender’s eligibility criteria. It’s pointless applying if you stand no chance of being accepted.
Personal loans are a major short- to mid-term financial commitment. Therefore, you should consider all these factors before making a loan application.