3 Questions to Help You Decide How Much to Borrow When Taking Out a Personal Loan

You don't want to borrow too little -- or too much.

If you are taking out a personal loan, the first and most important choice to make is how much you should apply to borrow.

It's possible for borrowers to find a wide range of lenders with different loan minimums and maximums, so you may be able to take out a loan for as little as a few hundred dollars or even for as much as $100,000 or more.

So, how should you decide how much money to request from your lender? Here are three questions to ask yourself to make this important choice.

1. What's the minimum you need to accomplish your objectives?

Obviously, the most important factor in determining how much to borrow is how much you need.

You don't want to take out a larger loan than necessary and get stuck with higher monthly payments and extra interest costs for no reason. And you also don't want to end up with too little for the loan to fulfill its purpose.

Sometimes, it's easy to decide how much to borrow. If you're trying to use your personal loan to repay debt, for example, you could add up the balances of your outstanding loans you want to consolidate and refinance. This would give you the total target amount to request from your lender.

In other circumstances, it can be more difficult. Say, for example, you're doing some home repairs and don't know how much the final spending total will be. In these situations, you'll have to try to make an informed guess and may want to err on the high side. You can always pay back any extra you are left with but getting another loan for more money later may be harder.

You could also consider other alternatives, such as applying for a line of credit you could draw from, if you don't know exactly how much you must borrow up front.

2. How much can you afford to pay back?

You'll also want to consider the impact of your loan on your ongoing financial situation when deciding how much to borrow.

If you decide you need $50,000, for example, but the monthly payments on such a large loan would be difficult to make or could interfere with other financial goals, then you may want to opt for a smaller loan amount.

Look carefully at your budget and assess how your loan payments will fit into it before you decide on the right amount to request from a lender. If it turns out you can't afford to borrow as much as you'd originally hoped, you may need to scale down your goals or wait a while to take a loan until you've saved more cash to contribute to your goals.

3. How much total interest will you pay over time?

Finally, you'll want to think about the big picture and make sure you're comfortable with interest costs over time. Otherwise, you could find yourself choosing a loan with a long repayment period just because it comes with affordable monthly payments -- but could get stuck paying a fortune in interest over the life of the loan.

By considering these three questions, you can make sure the financing you secure makes sense for you and that taking out your loan is hopefully the right decision in the long run.