5 questions when considering a personal installment loan
Financial problems plague a lot of people no matter how responsible they are with money. You don’t have to be unemployed to struggle to make ends meet. In fact, many people have two jobs and still struggle to pay their bills as costs rise but wages remain low.
In addition, there are inevitably unforeseen costs that arise throughout the year, whether it is for medical expenses, unforeseen events like weddings and funerals, or an urgent family trip across the country.
If you’re struggling to make ends meet, you might want to consider a personal loan with monthly payments. It is certainly not the last resort. On the contrary, the best installment loans come with reasonable rates and can open up possibilities for you.
However, you need to make sure you take all the variables into account. Ask yourself the following five questions when considering a personal installment loan.
1. What is the real cost of the loan?
When you take out an installment loan, it is tempting to think of it in terms of monthly payments. Can I afford to pay it off every month? If so, I should go, right? Well, not quite.
It is important that you fully understand what the loan will cost you. This includes all of the fees associated with the loan, as well as any interest you can expect to pay. It is not always easy to figure this out on your own, but luckily there are some very handy online loan calculators.
Once you have the real cost of the loan at your fingertips, you need to decide if it’s worth it. If this seems excessive to you, consider whether there are better ways to meet your expenses.
2. How will your credit score affect it?
Contrary to popular belief, personal loans are offered regardless of the severity of your credit or FICO score (your FICO score is a particular credit scoring system that determines your risk as a borrower) . Some loan companies will not ask you to disclose your credit score. However, a credit score is relevant for more than just determining whether a loan company will accept you.
Rather, lenders decide how much interest they will charge based on your credit score. They will vary the amount they are willing to give you based on your score, and they may impose more stringent conditions if your score is low.
If you have a bad credit history, you are definitely going to be hit with high interest rates. Check your credit score and read the fine print of each company on the impact it will have on your loan before committing.
Installment loans can actually help you build a credit score if you’re just starting out or if you need to catch up on past missteps. If the actual cost is not too high, this can be a great strategy.
3. Is early repayment an option?
It is not uncommon for people to take out a loan to meet immediate needs. You might know that you can pay it off in a month or two. However, payday loans and other short term loans can be expensive. So a longer term installment loan seems to be the best option. You expect to pay everything back much sooner than the agreed terms.
Unfortunately, it is not that simple. Lenders make money from long term loans because of the cumulative costs. They don’t necessarily allow you to prepay the loan, or they may impose a prepayment charge.
Find out if prepayment is an option and won’t cost you too much. Otherwise, consider shorter term loans.
4. Will a larger loan save you money?
Counterintuitively, a larger loan does not necessarily mean a more expensive loan. A larger loan opens up a lot more possibilities. While a small loan will help you pay your bills, a large loan can give you options for making money, either by investing or by giving you the ability to make bolder financial choices.
Of course, the number you get for the actual cost of the loan will be a major factor here. Even though a big loan opens up options, a high cost can negate the benefits.
5. Should I consolidate?
If you have already opened a number of personal loans, you should ask yourself if another loan is really the solution. It may give you relief in the short term, but leave you struggling for the foreseeable future. It is better to know if consolidation is possible.
Consolidation takes all of your loans and consolidates them into one loan. This can be done at no cost to you, making it easy to pay off everything without a huge cumulative interest rate.
Personal installment loans can create opportunities, but if you rely on them too often, you can dig yourself into a hole. Consider consolidation before opening a new loan. If that’s not an option, try to find alternatives.