There are lots of decisions that go into applying for a personal loan. Your financial circumstances have to be considered, of course, and the purpose for the loan is also incredibly important; if you’re using it to pay off existing debts, for example, that’s a more complicated situation than just getting a cash injection to pay for a personal project.
When it comes to personal loans, it’s important to take the time to consider whether or not they’re the right option for you. In some instances, they can be godsends or saviours, and in others, they can make things worse. Here are some tips to think about when it comes to deciding whether a personal loan is right for you or not.
Can you make repayments?
This is probably the most important factor in terms of whether a personal loan is a good option for you. If you’re able to make regular repayments on the loan – that is, if your financial circumstances are stable enough that you can allocate enough each month to make minimum repayments – then a loan is definitely something you should consider if you need it. On the other hand, if you know you’re going to struggle to keep up with repayments, then a loan is going to make things worse no matter how enticing it might initially seem.
What do you need it for?
Thinking about what you need a personal loan for is one of the first things you should do when you’re in the initial stages of the application process. A loan is great if you’re in need of cash that you just can’t quite stretch to, but you know your circumstances are comfortable enough to pay it back. For instance, if you want to buy yourself a new car and you’re in a secure job, then a loan could be a good idea. Similarly, if you want to carry out a DIY project or a home renovation, that’s another thing a loan can be useful for.
Do you have a good credit rating?
Lenders will usually perform credit checks when it comes to granting (or denying) a loan to applicants. Credit checks involve lenders looking at your credit score to see if you’re solvent enough to be considered for a loan. Lenders will usually take into account your financial circumstances, any loans you’ve taken out in the past, and other factors like whether you’re on the electoral register. It’s always a good idea to check your credit score before you apply for a loan; there are many free tools out there online to help you do this, so it won’t cost you a penny.
How much is the loan for?
Obviously, you should seriously think about how much you need to take out. The less you need to borrow for a personal loan, the better, because you won’t need to pay back as much and the interest won’t threaten to overwhelm you (unless you’re taking out a short-term loan, which could be inadvisable depending on your circumstances). If you need to take out a lot of money, ask yourself if it’s for a project that seriously needs to be completed right now, or if you could instead set aside some of your income each month in savings to prepare for the project that way.
Is your job secure?
Again, a personal loan shouldn’t really be considered unless you’re absolutely certain that you’ll be able to make repayments. As such, you should consider whether or not your job is definitely secure before you take out a loan. There are many ways that you can determine whether or not your job is safe. Pay close attention to what employers and colleagues are talking about on a daily basis, and watch the volume of your work to see if it’s increasing or decreasing. By making this judgement, you’ll be able to better prepare for your future in financial terms.
What type of loan is it?
There are, of course, many different types of personal loan out there, and some of them could be more appropriate for your circumstances than others. Let’s take a look at some of the most common types of loan and where they might be a good idea.
- Unsecured personal loan. An unsecured personal loan is the most basic type of loan; it sees lenders simply loaning you cash on the understanding you’ll pay it back. No collateral is involved.
- Secured personal loan. As you might imagine, a secured personal loan stands in opposition to an unsecured loan, because there is collateral against which the loan is secured. This means if you don’t make repayments, that asset, such as a house or vehicle, could be at risk.
- Credit-building loan. Some loans exist solely to help you build your credit score. These are credit-building loans, and they usually work somewhat differently to regular loans, so discuss them with your lender before agreeing to them.
- Peer-to-peer loan. There are websites out there that will connect individuals with money to loan and people who need to borrow it, and this peer-to-peer relationship doesn’t quite resemble the classic lender-borrower dynamic.
- Short-term (or “payday”) loan. Short-term or payday loans have been considered quite controversial in the past, but they can be a good option in specific circumstances. They often come with sky-high interest rates, though, so it’s a good idea to think thoroughly before you apply for one.