At points in most peoples’ lives, there comes a time when taking out a personal loan makes sense. Loans can be taken out for almost anything and its good practice to review your situation before entering into a financial agreement.
There are many places you can acquire small personal loans from, including banks, credit unions, and peer to peer (P2P) lenders. However, it’s important to remember that you’ll probably have your credit rating scrutinised by lenders. A failed application for a credit or making too many applications in a short amount of time could negatively impact your credit rating for a few years to come.
So, take a moment to read through our 4-point checklist and make sure you aren’t rushing into a personal loan or overlooking anything!
1) Do you have a real reason to get a personal loan?
Getting a small personal loan should never be thought of as a trivial or minor undertaking. While you can secure a loan for almost anything (providing your credit rating allows it), it’s important to remember that the consequences for defaulting could be dire and life changing.
Therefore, it’s vital that you examine your reasons for wanting a personal loan and work out if it’s really necessary. Is it essential you secure a loan quickly? Is there any way that you could put an effective budget in place to save the money you need before taking out a personal loan?
No matter what you decide, it’s worth considering all your options and never rushing into securing a personal loan.
2) What should you get a loan for?
When it comes to small personal loans, there are a range of sensible reasons why people choose to take them out. Using a loan to consolidate your credit cards into one monthly payment is an attractive idea if taken out at the right time. This is because the interest rate you might get on your small personal loan could be far lower than your credit cards’.
Taking out a small personal loan and paying for a purchase in cash is normally far better than going directly through a seller for finance. Just remember that you should never rush into a finance agreement with a seller without at least looking into different personal loans available to you.
If you’re organising an event, birthday, or wedding, then paying for everything with a personal loan is also a sensible choice in most cases. The amount of interest charges on a credit card would probably be far greater than any personal loan you take out.
Finally, it makes great sense to use a personal loan to improve your credit rating. A personal loan can do this in two ways. Firstly, it will add diversity to the types of loan you have. Secondly, it could lower your credit utilisation ratio, which can increase your credit rating score.
3) What shouldn’t you get a loan for?
While you should get a loan in some cases, in others you simply shouldn’t. Paying off a student loan is one of those cases where you shouldn’t. A personal loan may seem like it would lessen the financial burden, but it could make things worse. A student loan will normally come with a tax advantage and it’s possible that the government could offer a loan forgiveness programme in the future. If you switched to a personal loan, then you aren’t eligible for either of these things.
Surprisingly, you may not realise that it could actually be a bad idea to get a loan if you’re trying boost your credit rating. Although, this would only be the case if you’ve recently been refused a personal loan or already have a poor credit rating. In this case, you should continue to repay all your credit card debt and any other debts on time.
4) Are you overlooking any important factors?
Getting a personal loan should never be a case of walking into your bank and signing on the dotted line. You’ve got to shop around and find yourself the best terms out there from the most reputable lender available.
You should always try to repay your small personal loan quickly as dragging it out simply costs you more money. When taking out a loan, never accept anything other than a fixed interest rate loan as variable rate loans can turn out to be an expensive risk to take.
Finally, always seek out the best TAR and T&Cs. The only true way to see how much interest you’re going to pay on your small personal loan is by looking at the total amount repayable (TAR). While rare, you may find terms and conditions (T&Cs) that allow you to make early repayments and pay off the whole loan early.
So, if you’re thinking of getting a small personal loan you can now make a more informed decision. However, if you’re struggling with debt, there are other options out there. We have a range of debt solutions that could help you get your finances back on track quicker than a personal loan. Get in touch with our friendly team to discuss your options today!