Taking a personal loan can either improve or worsen your financial situation. They can be extremely helpful in emergency situations, like to pay off medical bills, but the fact remains is that you’re taking out debt. If you can’t pay back your loan, you can get stuck in a mountain of debt that’s impossible to climb out of.

Sometimes we make decisions before weighing out all of the pros and cons. You want to make sure you ask yourself these 6 questions before you apply for a personal loan.

1. What exactly is a Personal Loan?

Personal loans are exactly what they sound like, they are loans used for personal reasons. These reasons can be to cover medical expenses, home improvement projects, consolidate debt, or really any large purchase you might need to make in your life. There are also different types of personal loans out there, such as secured versus unsecured loans. Secured loans require you to put up some type of collateral in the event you default on the loan, while unsecured loans don’t require any collateral. Depending on your financial situation and credit score, you’ll want to figure out which type of personal loan is best for you.

2. Why do you need the money and do you actually need it?

Do you need a personal loan for an emergency, to get out of debt, or is it just for personal spending or luxury? If you need the money to get out of debt or to save money, getting a personal loan can be a good idea.

If your personal loan is being used for leisure or to fuel poor spending habits, you probably should not take out the loan. Irresponsible spending will put you in more debt. Don’t dig yourself out of a bigger hole and risk your credit score. Don’t move forward until you’ve decided if the money is a necessity or a luxury.

3. What is my current financial standing and credit score?

A great question to think about is what your current financial situation looks like. Do you have a stable job so you can make on time monthly payments? What is your credit score? If your credit score is low, you may not even get approved for a personal loan or get stuck with one with a very high interest rate. You’ll also want to think if you have recently tried to apply for new lines of credit. Lenders tend to be skeptical of you if you have recently and frequently tried to borrow money from them.

4. How much do I need to borrow?

You don’t want to take out more than you need, since that’ll end up costing you more in the long run as you pay it off. But at the same time, you want to make sure that taking out this loan will actually be enough money to help cover whatever the costs you might have. The amount of your personal loan and the interest rate is determined on your current financial standing and your credit score, so again, be sure to know where you stand before you apply for a loan.

5. Are there any other options?

There are other ways to borrow money before considering a personal loan. A personal loan may not be your best option, so make sure to exhaust all other options. In fact, you might owe more money with a personal loan. Look around for cheaper alternatives if you need to borrow money.

Reaching out to a family member can be a less expensive option. Even though it might be a sensitive topic, sometimes family members are willing to loan money. If you’re lucky, borrowing money from a family member may not come with interest. Applying for a credit card can be a less expensive option as well. Typically personal loans have lower interest rates than credit cards, but some credit cards offer a 0% interest promotional rate. Having that promotional rate is beneficial because you avoid additional debt with no accrued interest. Specialized loans such as student loans and auto loans are also available. Sometimes specific loans can be more affordable.

6. What’s the total cost of the loan going to be?

You need to know what your monthly payments are and the total cost of the loan. A personal loan may not be worth it if total cost of the loan after interest is not within your budget. You want to calculate how much the entire loan is going to cost you by estimating how many months it will take you to pay it off multiplied by the monthly cost including interest.

Think twice about taking a personal loan if paying it back isn’t within your budget. As a borrower, there’s a lot risk if fail to pay back the loan. This can result in fees and will negatively impact your credit score.

Conclusion

Make sure you answer these six questions before applying for a personal loan. Answering these questions will help you decide whether or not a personal loan is right for you. Don’t make blind decisions without having full understanding of a personal loan and how it can affect you.

Resources:

1. https://finance.yahoo.com/news/6-questions-answer-getting-personal-120000924.html
2. https://studentloanhero.com/featured/how-to-get-a-personal-loan-10-key-questions/
3. https://www.1ffc.com/8-questions-you-should-ask-before-taking-out-a-personal-loan/
4. https://www.goodfinancialcents.com/questions-to-ask-when-applying-for-loan