Personal loans are an affordable way to borrow money but can involve some risks if not used correctly. If you’ve used a loan payment calculator to run the numbers and see if they fit with your budget, you are already on the right track, but there are a few other factors to consider to ensure that a personal loan is the right option for you.
The purpose of a personal loan is to provide a way to borrow money that has a regular and manageable repayment. When applying for a loan via a reputable financial institution or bank, they will often have you talk to a loan specialist to run through all of your options on repayment terms to find the best solution for you.
If you ever find that the numbers presented to you feel too high and that you may struggle to afford them, you should consider borrowing less or step away from the application process and look at options from another lender.
Personal loans can be taken out for a variety of reasons, but most often, they are used to fund significant life events or cover unexpected expenses such as:
- Paying for a wedding
- Consolidating existing debt
- Paying for medical bills
- Funding urgent home repairs or renovations
These events and expenses can have varying price tags attached to them, but it’s important only to borrow what you need. You should use a personal loan to solve an issue you are facing, not to fund a lifestyle above your means. For example, if you are using it to consolidate debt, you would borrow the amount needed to clear those credit cards and, once they are paid off, close the credit card accounts so that more debt can’t be run up. If you use it to pay for a wedding, make sure you have a budget in mind and have already researched wedding costs. Don’t borrow up to the full amount offered and then plan a wedding to use up that total sum of money.
While consistent timely repayments on a personal loan can help improve your credit score, having too much outstanding debt relative to your income can affect your future chances of borrowing. This is known as your Debt To Income ratio, and it’s what a lender will look at during your application process for any future borrowing. For example, if you take out a big loan to pay for your wedding and then want to look at buying a home with your new spouse, it may be that your debt to income ratio is too high to qualify for a mortgage. And of course, late payments and missed payments on the loan can hurt your credit history—so finding an affordable payment is key.
As long as it is done via a reputable financial institution and you are going into it knowing what you need to borrow, taking out a personal loan can be a low-risk form of financing.
While lenders have a responsibility to offer affordable and sensible lending; the main onus falls on you to only borrow what you need to and what you can comfortably afford to pay back.
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