The answers to these questions can help you make the best decisions about a personal loan.
Before entering into a serious relationship, you ask yourself a series of questions. Do this person’s values match mine? Are we having fun together? Etc. The same should be true when entering into a serious financial relationship, like borrowing money. There are questions you should be asking yourself and questions for the other party (in this case, the lender).
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Questions to ask yourself
Before taking out a personal loan, ask yourself the following three questions:
1. How is my credit?
You owe it to yourself to check your credit history and credit score. The higher your credit score, the lower the interest rate you qualify for. The interest rate matters. Let’s say you borrow $ 25,000 for 60 months to renovate your kitchen. Here’s the difference between how much you could pay with a great credit score and how much you could pay with an average score:
While a 100 point difference in credit score might not seem like that much, it can be costly. In this case, your monthly payment would be $ 112 higher, and you would end up paying $ 6,746 more for the five-year loan.
Before taking out a loan, try to increase your credit score if you are not happy with the situation. While it will take time and effort, it will likely pay off a lot.
2. Is there anything in my budget that I should take care of first?
Your Debt-to-Income Ratio (DTI) compares what you earn to the portion of your income spent on paying off your debt each month. Typically, a lender wants to see a DTI of 35% to 40% (or less). The problem is, you might be approved for a loan that you can’t afford.
Let’s say you find a personal lender that you want to work with. The interest rate seems fair and you are happy with the terms of their loan.
Just because you’re approved for a loan doesn’t mean you can afford it, especially if you have a lot of irregular financial obligations that don’t show up on your credit report. For example, if you pay for a private school for your kids, club memberships, regular vacations, and expensive hobbies, you might have a hard time paying off the personal loan as agreed.
Even if you’ve been approved for a personal loan, take a close look at your budget, including how much you spend on the things you love each month. This way, you can make sure that you can easily afford the monthly payment. If not, you might want to think about what expenses can be reduced to make room for a new financial obligation.
3. Will a personal loan benefit me financially in the long term?
There are things we spend money on that provide experiences and memories but no financial return. For example, a night out at the best restaurant in town or a hot air balloon ride may be worth the price in terms of experience. However, in terms of finances, you won’t see a return on your investment.
On the flip side, a mid-range kitchen remodel will set you back around $ 23,452. When you sell your home, you are likely to get back $ 18,206 of that amount, or 77.6%. If you are considering a minor bathroom remodeling or landscaping project, you could get a return on your investment of 100% or more.
Before contacting a personal lender, determine how important it is to you to enjoy a return on your investment.
Questions to lenders
Now that you have a better idea of what to personally look for in a loan, here are three more questions to ask potential lenders:
1. What is the best interest rate you are offering?
As the scenario above illustrates, the amount you pay in interest matters. A difference of as little as 1% to 2% can save you money. Finding the answer to this question is why it is important to shop around for lenders before choosing one.
The advantage of most personal lenders is that they only perform a “soft” credit check before letting you know if you qualify for a loan and, if so, how much you will pay in interest. A gentle check does not affect your credit score. It is only when you decide to take out a loan that the lender performs a “hard” credit check which can hurt your credit score a bit. Don’t worry, though. As long as you make regular payments on the loan, your credit score should rebound fairly quickly.
2. Would a secured loan save money?
Let’s say you want to make several improvements to your home, each designed to increase your personal comfort and add to its value. If your goal is to get the lowest possible interest rate, it is helpful to determine how much that rate would be if you opted for a secured loan rather than an unsecured loan. Most personal loans are unsecured, which means you don’t put anything of value as collateral.
On the other hand, a secured loan requires you to pledge something of value in exchange for a lower interest rate. For example, if you have a house, car, gold coins, or other valuable item, it may be eligible for collateral. As long as it assesses enough to repay the loan if you miss payments, a lender may be interested.
While a secured loan is likely to save you money, there is one thing to keep in mind: if you do not make the payments as agreed, the lender has the legal right to repossess the loan. the guarantee, sell it and recover its losses.
If you have a great credit score, there’s no reason to pay for extras like origination fees or a prepayment penalty. If your credit score makes you attractive to lenders, do yourself the favor of educating yourself about the fees.
The difference between making a financial decision that is right for you and one that you might regret is asking questions before signing a contract. It all comes down to something a lot of our parents used to say, “Look before you jump. “