Regardless of how strong your financial planning might be, there are often emergencies that arise requiring more funds than you have available. In addition, you probably have dreams and aspirations for which you need to plan. Whether it is a medical emergency or your desire to go on a Hawaiian vacation, a personal loan can be a way to obtain those needed additional funds.
However, applying for a personal loan can be a major decision, thorough planning and research should take place before that decision is made. You will want to find a lender that will offer the funds that you need, an interest rate that is not simply the highest allowable rate and a payment plan that you can afford. Before we get to our list of things to consider, let’s talk about what a personal loan is.
A personal loan is a consumer loan granted for personal, family or household use, as opposed to business or commercial use. Some examples of how a personal loan may be used include medical emergencies, vacations, tuition costs or home repair. A personal loan may be unsecured (a signature loan) or secured (using an asset as collateral) and are usually paid back over time in equal installments. Some loans, however, are paid back in one single payment or a series of smaller payments followed by a final, large payment (balloon payment).
What you should know before applying for a personal loan
Here are a few important things that you ought to know before signing up for a personal loan to ensure that you get exactly what you are looking for.
A credit score is the number that results from a statistical summary of your credit history. Factors such as your payment history (including how often payments are late or missed), the amount of overall debt, the amount of credit card debt vs the amount of credit available to you, any defaulted loans or judgments are among those considered. Essentially, your credit score represents how well you handle your financial obligations and how much of a credit risk you may represent to a lender. The higher your credit score the less of a risk a creditor believes you are. By knowing your score, you have a better idea of what type of credit you may qualify for. If you have a high credit score you may qualify for a bank loan or a new credit card at a reasonably low interest rate. If your score is substantially lower you may have to apply for a higher interest loan, such as a payday or title loan.
The interest rate you are charged for borrowing funds determines the amount you will be responsible for paying back. For example, let’s look at a $1,000 loan paid back over two years. At a monthly rate of 17% (204% APR) you will pay almost $3,200 in interest, but at a monthly rate of 14% (168% APR) your interest will total just over $2,500, a savings of over $700 over two years. What this means is that it may not be wise to accept the first loan offer you receive, just because you apply for a loan and are approved does not mean you must accept the terms offered. By applying at two or more locations you will be able to compare offers and choose the one right for you.
In addition to the interest rate, there may be other charges to consider.
Some credit cards may charge an annual fee, if you are planning on paying back funds over a three-year period you will need to consider three years’ worth of annual fees to determine the true cost.
Another potential cost is a pre-payment penalty. When a lender offers you a loan they do so expecting you to pay it back over the full term, thus allowing them to maximize their potential earnings. If you pay back the loan in two years the lender makes less money. To mitigate this loss of interest payments, some lenders will add a pre-payment penalty to the contract, requiring you to pay a penalty if you pay off the loan before you were scheduled to do so. In most cases, this penalty will equate to three months of interest.
Something else to consider is what the contract calls for in the case of a late payment. A late payment will almost always cause you extra interest (because the principle remains larger for a longer period), but there may be an additional penalty as well. It is important to know when you will be charged a late fee (one day late? Five days? Ten?) and the amount of the fee. No one should ever plan on making a late payment, but you should be aware of the potential costs if you do. Those extra funds, that extra year, they sound great but that is where a lender can try and take advantage of a borrower who allows emotion to take over. Have a plan and stick to it. By doing that, maybe the next time a financial need arises, you can just pay for it rather than having to take out another loan to do so.