Financial circumstances can create problems for every human being, at any point in time. You might be good with your finances, but it is not necessary that you will get away from every financial issue with flying colors. There are instances where people are working two or more jobs and still struggling to pay off their debts. It is because the normal costs are increasing day by day, but the income isn’t.
If you’re one of these poor people and continue fighting to keep up with expenses, you might think about taking out a personal loan with monthly installments. The best installment loans might be offered at cheap interest rates and can ease your monthly burden.
However, you must consider all aspects and possibilities before opting for a personal installment loan. For that reason, you may ask yourself these questions to ensure you are choosing the right loan.
8 Questions to ask yourself before borrowing a personal installment loan
1. Why do I need a personal installment loan?
You might be needing a personal loan to consolidate your debts, to finance a purchase urgently, or to pay for your much-awaited home improvement works.
Without understanding the requirements of your loan you can’t put your first step toward making such important decisions. You need to know how much you’ll borrow and whether or not you require a personal loan immediately.
Lenders might ask you why before approving your loan application. You must mention the reason in your application clearly, and explain how you are going to use the money.
Most of the time, your reason for opting for that loan does not have any effect on your application. However, some lenders might restrict how borrowers can use such funds.
2. How much can I afford?
It is the most important question that should come to your mind. You should decide on the loan amount as per your affordability.
You shouldn’t forget that the bigger your loan, the higher you have to pay monthly installments. You’ll also have to pay the interest and origination fee costs.
Here are some ways to pick the best fit personal loan:
- Review your monthly budget and the cost you are carrying each month.
- Calculate the amount that you normally have after making bill payments each month.
- Determine how much you can afford to pay on new debt.
- Find sectors where you can cut off expenses and make more room in your budget.
- Compare your need for a loan with your other financial goals.
3. What is the total cost of that loan?
While opting for an installment loan, you must understand how much this loan will cost you. You must consider the fees and interest associated with the loan. You may use some online loan calculators.
Once you have estimated the actual cost of the loan, you should balance it with all your income in a month. If you feel it is too much load for you, you should start searching for better ways to gather funds.
4. What’s the interest rate?
When you search the market for an installment loan, you’ll target the best interest rate, provider. Don’t apply for the first loan you find online. You need to evaluate different loan options with proper research and select the one with the lowest rate.
The interest rate will denote how much that loan is going to cost you. Short-term no credit check loans work like cash advances and title loans would charge interest as a flat fee. The biggest catch on installment loans is that it charges interest at an ongoing rate. The longer you take to pay off the loan, the more interest you have to pay later.
You must keep in mind the loan’s annual percentage rate (APR). Less APR means you will likely be paying less in interest than the standard rate.
One of the biggest benefits of installment loans is – it can save you a lot of money if you pay early. The sooner you pay the loan off, the lesser interest you’ll pay.
5. Are there prepayment fees?
It is a fact that lenders earn their profit from interest that borrowers pay through a longer loan payment term. Lenders may offer amazing incentives to keep their borrowers away from making advance payments or full payment of the loan.
That’s why some lenders may charge prepayment penalties to the borrowers who want to pay their loans before time. So, it is very important to know if the installment loan is bundled with prepayment penalties. Since you’ll sign a contract, you must check the terms of the deal clearly to avoid any kind of confusion.
As Randall Yates, CEO and founder of The Lenders Network added – “Prepayment penalties are very rare to see these days, they’re illegal for government-backed loans.”
“Prepayment penalties are illegal on any loan in 14 U.S. states” and that “the other 36 states have drastically reduced the number of loans issued with a prepayment penalty.”
6. Are you okay with the loan term?
When it comes to getting a loan, it is far more important than you can pay it off. For that reason, it is wise to get an idea about how much your installment loan can cost you. After that, you must determine how much time you have to pay it back.
Few high-interest loans, such as payday and title loans, should be repaid within two or three weeks on average. As per the agreement, you are bound to pay off the entire loan plus interest in a single, big payment. That can be very difficult for most borrowers.
This is the core reason why most borrowers choose installment loans instead of a payday loan or title loan. A personal installment loan may give you the option to pay back the loan amount with interest through regular payments, and over a longer tenure. The given time frame should be somewhere from six months to three years.
If you want to determine “how much installment loan can cost you”, you may need to ask your lender about the repayment tenure. This way you may be able to calculate how much you are paying off towards the loan. Do this before signing the contract.
7. Do I need to consolidate?
If you are already carrying multiple personal installment loans, you should think again about whether or not another loan is required. It might give you short-term relief from increasing expenses. But actually, it will only increase your debt burden. It’s wise to consolidate your debts first as soon as possible.
Consolidation works by turning all of your loans into one single loan. You can do this without any extra cost, and it will be easier to pay off without a huge combined interest rate.
Personal installment loans are good only if you use them wisely, and do not borrow too often. On the other hand, if you are getting sick of multiple loans and multiple interest rates, then go for debt consolidation before opening up a new loan.
8. How does your credit score affect your loan application?
You may find personal loans offered to people with bad credit or low
FICO scores. It is a typical and popular credit rating system that is used to estimate the potential risk of a borrower. Fico scores are considered by most lenders while approving loan applications.
Lenders may decide how much interest should be offered to you depending on your FICO score. The interest rate may vary and loan terms can also be more rigid or flexible considering your score.
If you have a bad credit score, be rest assured that you’ll be offered high-interest rates. Check your credit score and read the fine print carefully before applying for a personal installment loan.
However, it can help you build your credit score. You just need to use the loan wisely and do not repeat your past mistakes.