While a personal loan can bring a lot of value at any given time, there is undoubtedly also a price attached to it. It’s a loan, after all. So before you take the plunge, here are the four essential questions you need to ask yourself before considering a personal loan.
1. Why do I need a personal loan?
There are a variety of reasons why people decide to take out a personal loan. For some, it is to consolidate credit card debt, for others to pay off student debt or to make a major purchase. Some people have no choice but to take one because of unforeseen medical costs, while others choose to take one out for significant expenses such as weddings or for home improvement purposes.
Before you consider taking out a personal loan, you need to be really clear about your reason for obtaining one. It shouldn’t be something that is done without a thorough examination of various options.
What are your goals for this personal loan? How will it make your life better? While it may feel like free money at the time, it most certainly isn’t, and so you need to be confident that it is worth the many years of repayment later.
Before you apply for a personal loan in the UAE (or wherever you are applying for one), consider other loan products to ensure that you are making the right choice. For example, if you have existing debts to pay off, you could take out a debt consolidation loan instead of a personal loan, or a home equity loan to finish your home renovation project.
The point is that you should never take out credit if you don’t genuinely need it, and if you don’t have specific plans and goals for using it.
2. What is my current credit score?
Once you’ve established that you really need a personal loan, it is time to check your credit score. You’ll never know if you will be granted a personal loan until you apply, but knowing your credit score will give you with a very good idea of your chances of getting loan approval.
Keep in mind that most personal loan lenders have a minimum credit score requirement. so if your score isn’t competitive (depending on your region or location), then you may want to contemplate waiting until your score increases.
Not only will your credit standing determine whether or not you can get a loan, but it also signifies what interest rate you’ll qualify for.
3. What is a feasible monthly payment scheme?
Just because you are being offered a large personal loan, doesn’t mean you have to take it. You have to keep in mind how much you can feasibly afford to pay every month.
The bigger your personal loan, the higher your monthly installment payments, your interest rate and your origination fees will be.
Prior to applying for a loan, make sure you examine your budget and monthly cash flow. Talk to your bank about the state of your accounts. Identify how much you can dedicate to satisfying payments on a new debt.
This may mean that you have to brainstorm methods for lowering your expenses to make room in your budget for a personal loan. You may have to seriously weigh your need for a personal loan against your other financial goals.
However, these are judgments that need to be addressed and costs that must be calculated, before you apply for a personal loan.
4. How will I pay this back?
Once you know how much you can realistically afford as monthly payment, you also need to consider exactly how long you need to pay back the loan in full. Even if numbers make you feel dizzy, you need to lay out your plan so there are no surprises.
How much your monthly payments are will be directly affected by the loan tenor — and, as you know, the repayment scheme must be affordable for you.
If your principal worry is maintaining low total costs, then opt for a personal loan with a shorter term, as you will pay less interest and get out of debt faster.
At this point, if you have asked yourself all of these questions, and you still want to go ahead with a personal loan, it is time to consider what you are looking for in a lender.
As many financing sources offer personal loans, each with their own range of interest rates and terms, it is crucial to shop around and weigh your options before committing. After all, you want to make sure you are getting the most favorable loan to finance your needs.
A personal loan may be one of the biggest financial decisions you will make, so it is essential that you put in the time and effort to research and plan before jumping into anything. Good luck!
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