We all have dreams and wishes and having just a bit more money sometimes could make a real difference. Most of the times the idea of a personal loan pops into our mind when we want to upgrade our homes, consolidate debt or take that trip with the kids to Disney Land. Before you jump right into debt, pour yourself a glass of wine and interview yourself honestly with these questions.
1. How much money do I really need to achieve my goal?
Finance is all about strategy. You need to think like a general in battle or like a manager. Organize with pen and paper (or spreadsheets) and get the numbers right. Don’t just make an estimation from the top of your mind. Get down and dirty with details and add up every item that needs to be on the list for your final goal, whether it is a trip, a wedding or expensive surgery. Once you have the sum, decide on what funds you already have and how much more do you need to borrow. Keep in mind that next to this value you will also have to repay interest.
2. Can I afford the expected monthly payment?
Here we will make a comparison with the basic physics equation: distance is velocity multiplied with time. Your total paid amount is equal to your monthly rate multiplied with the number of months. The faster you want to get out of debt, the higher your payment will be. You need to remember that defaulting a term results in credit score penalties and possibly higher interest rates next time. So be sure to settle for a rate that fits in your budget comfortably. Never go for the maximum allowed which is around 35% of your earnings.
3. Am I eligible for the loan I intend to apply to?
Depending on your current FICO score, you will have to select a lender which has a product designed for your credit score bracket. Luckily, there are enough choices on the market for every type of borrower. For example, a fair score (min 600) can grant you up to $ 25,000 with an APR starting around 18% and going as much as 36%. For more specific details you can check the lendingpoint.com reviews or similar examples.
4. Secured or unsecured?
The difference in the APR comes from a combination of different factors such as the score, other debts, your age, employment length, and other items. A way to decrease your APR is to take a secured loan, but this is also taking a much higher risk related to the collateral you use. For example, if you use your car as a way to secure the loan and you miss a few payments you could lose your vehicle. The same reasoning goes for the home. Of course, if you got this far with your assessment and you have a good answer at question two, this is worth considering.
5. What is acceptable for me? What makes a great deal?
At the end of the day, nobody knows better than you what makes you happy and what you consider acceptable. Also, never assess a loan just looking at the APR and timespan. Try to take into consideration all aspects, including fees, possible penalties, and perks.
Don’t be afraid to shop around until you find a lender that works best for you. Remember however to ask just for soft inquiries or too many hard pulls could seriously affect your credit score. To minimize damage just fit all searching within 30 days.