Getting a personal loan might not always be a good idea. Let’s explore the reasons why you should or shouldn’t get a loan, and five tips to help you decide if it’s the right option for you.
When should you consider getting a personal loan?
Personal loans can be a way to reach a short-term goal, like paying for home renovations or consolidating debts into one cheaper and more manageable repayment. They can make sense when you need extra cash to cover unexpected bills (e.g., home repairs), if your emergency fund is depleted or in cases where a personal loan works out cheaper than other types of credit.
But there are as many reasons why getting a personal loan might not be the best approach.
What to consider before taking out a personal loan
Some people take out personal loans to fund a holiday, wedding or new car. Be mindful of getting a personal loan to pay for non-essential expenses or ‘bad debts’. Bad debts are purchases that cost you money but have no value (such as a holiday) or will decrease in value over time (such as a worn wedding gown or a boat).
That’s not to say you should never use a personal loan for these expenses, but it is important that you think through whether you really need a loan, if you can afford it, and whether it will be worth it in the long run.
5 tips to prepare for a personal loan
That being said, if you are considering getting a personal loan, there are 5 things you can do to help you decide.
1. Be realistic with your cashflow
Review and update your budget for an accurate view of your financial health and standing. If you fix up your budget and find you only have a small amount left each week, it may be too unrealistic for you to take on loan repayments while meeting existing expenses and maintaining your quality of life. Be honest with yourself about what you can realistically afford.
2. Have a clear and purposeful reason for getting a personal loan
Get clear on why you’re applying for a personal loan. If it’s for everyday expenses, it would be wise to rethink and research other options. You might feel that getting a personal loan to help pay for home renovations or to consolidate your debts might be a more worthwhile reason, as you could potentially be financially better off longer term. Consider the bigger situation, research all your options and revise your budget.
3. Plan ahead. Reverse engineer your success.
Taking out a personal loan requires determination and discipline to consistently meet repayments. However, you may be able to work your budget and see if you can put aside extra cash to make additional loan repayments along the way. Even $50 a month extra can reduce the interest you pay, and decrease your repayment term (should your loan terms and conditions allow additional repayments).
4. Get comfortable with delayed gratification
We live in a world of instant gratification where credit cards and buy now pay later services allow us to purchase things we don’t have the cash on hand to pay for. It can make it easy to live beyond our means and get ourselves into unnecessary debt.
Before taking out a personal loan, try setting a few financial goals. For example, if you’re considering a car loan, could you make do for a few more months and save a deposit instead of borrowing the full amount? Your repayments will be reduced and your total loan amount will be too, meaning you’ll have more money to save or spend!
5. Shop around for the right personal loan (for you)
The more research you do to find the best deal for your needs and circumstances, the better you’ll understand which loan will work best for you. You’ll need to consider things like annual fees; interest rates; the repayment term or loan term (how long the loan lasts); and the features, terms and conditions, such as whether you’re able to pay the loan off early.
Good research should also prevent you from falling into the trap of making multiple applications (especially for loans you’re not eligible for), as this can negatively affect your credit score and eligibility for finance in future.
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