by Christy Bieber | June 24, 2019
Make sure you can answer these questions before you take out a personal loan.
Personal loans can be an affordable way to borrow money when you need it -- especially compared with most credit cards or high-interest consumer loans such as payday loans. But you're still going into debt when you take out a personal loan, so you need to be responsible about it.
Before you ask a lender to give you money and commit to paying it back, you should make sure you can answer these six questions.
If you could use the funds to help you save money -- for instance, through debt consolidation -- then taking out a personal loan may be a good idea. Personal loans can also be a smart source of funding for expensive purchases you need to make, such as essential home repairs.
But if you're trying to pay for a luxury -- such as a vacation or a big wedding -- think twice about using a personal loan. You'll end up paying interest and making monthly payments for years for something that won't improve your financial situation in the long term.
Looking for a personal loan but don't know where to start? The Ascent's picks of the best personal loans help you demystify the offers out there so you can pick the best one for your needs.
When you need to borrow money, you want to do so in the most affordable way possible. So make sure a personal loan is indeed the cheapest way to borrow.
Personal loans have much lower interest rates than the standard APR on most credit cards -- but some cards do offer a 0% promotional rate and you may be better off with one of those if you can pay off the loan before the 0% rate expires. Or if you're borrowing for a car, an auto loan may be a better and more affordable source of financing.
Make sure you consider total loan costs and other borrower benefits when you decide how best to secure funding.
Unless you're 100% sure you can make every loan payment by the deadline for the entire life of the loan, don't borrow. You'll ruin your credit, risk late fees and penalties, and put yourself in jeopardy of being sued if you borrow money you can't pay back.
Many personal loans have a three- to five-year repayment schedule, but some allow you to pay back your loan over a shorter or longer time period. Understand how long you'll be in debt and consider how this will impact other financial goals you may hope to accomplish during that time frame, such as buying a home or starting a family.
Make sure you don't borrow unless you understand every aspect of your loan. This includes whether the loan has a fixed or variable rate, whether there's an origination fee or prepayment penalties, and what your interest rate and APR will be.
You never want to take out a loan if you don't understand these things, as you could find yourself paying unexpected costs or, if you opt for a variable-rate loan, facing rising monthly payments.
Want to pay off debt faster? Check out our shortlist of the best personal loans for debt consolidation and cut your monthly payment with a lower rate.
Finally, you need to know not only what your monthly payments are, but also what the total loan cost will be, including the principal and interest. Only by understanding the total cost of the money you're borrowing can you decide whether the loan is worth it.
By answering these six questions, you can make sure you take out an affordable loan, don't borrow unnecessarily, and don't take out a loan you don't understand. Learn the answers in detail before you sign on the dotted line of a loan application to avoid serious financial trouble.
We've vetted the market to bring you our shortlist of the best personal loan providers. Whether you're looking to pay off debt faster by slashing your interest rate or needing some extra money to tackle a big purchase, these best-in-class picks can help you reach your financial goals. Click here to get the full rundown on our top picks.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2021 The Ascent. All rights reserved.