When you need some extra cash taking a personal loan may be the easiest way to get your funds. It is often quite a simple process, and – as long as you have a decent source of income – some security, and a good credit score, you have a good chance of getting your application approved.
Sometimes taking a small loan can be the best option, but it is not always a good idea. To determine whether you are good for a personal loan, and what kind of interest rate applies to the loan, the lenders assess your financial situation and your ability to repay your loan on time. Apart from that, they may look at the reason for applying for a quick same day loan.
What Are the Bad Reasons for Taking a Loan?
Some are quite obvious.
You should never take a loan and spend the money on
– Impulse purchases
– Investing – especially if you do not know a lot about investing
– Paying off another debt (remember, more fees and interest rates)
– Holidays, fun and entertainment
– Appliances and other household goods that you do not need
– Remodeling (different from necessary repairs and maintenance).
Also, if you take personal loans just pay for the most basic expenses, like rent, bills, and food, you may need to look for other solutions – increasing your income, side hustle, smarter budgeting, talking with a financial advisor.
Making up your mind about the loan requires asking a few questions and considering possible alternatives. That way you can avoid taking loans that will simply cost you more money.
Questions to Ask Before Applying for a Personal Loan
1. Do I really need this purchase?
The answer is not always obvious. Many people buy a new car just to keep up with the Joneses even if they know very well that they cannot afford it. Taking a loan to buy the would be an example of a bad reason to take a loan.
If, however, you work as a care worker, you need a safe and reliable car to take your elderly or disables clients shopping and to medical appointments without any dramas.
2. Are there any alternatives?
Taking a personal loan because it is the easiest thing to do is one of the examples of a bad reason to take a loan. Considering alternatives can save you a lot of money.
If you have enough money to buy a more basic car that is in a very good condition reliable (maybe trading your old one, too) taking a loan may not be necessary. Borrowing a few hundred dollars from family or friends will solve the problem, and you will not have to pay the interest rates and fees.
3. Will, I be able to repay that loan?
The lender will check it anyway, but you need to make sure that making the payments will not add more stress to your life.
4. Do I really need that much money?
Even if decide that you need the loan, think carefully about the amount you need. A wedding is a common reason for taking a loan, and that’s understandable. Some costs are high: venue, decorations, photography, food and drinks, the cake, ceremony – it all adds up. But do you really want to spend over $5000 on your wedding dress and almost $700-$800 on each of your bridesmaid’s dresses?
Taking a Loan: Making a Smart Decision Can Save You Money
If you understand how loans work, and how much it cost you additionally to use them, you can make an informed decision. Taking a loan should finally improve your situation, not make it worse.
If you are planning to sell your house, taking a personal loan and spend it on a kitchen or bathroom renovation is probably a smart thing to do.
According to LJ Hooker, “The kitchen is the one room that can make or break a sale. It’s usually the most expensive room in any house, so prospective buyers don’t want to see a kitchen that needs a total upgrade.”
An outdated kitchen or bathroom, worn tile, a bad smell can put the potential buyers off. Investing money in renovation not only can make the sale but can also help increase your property’s value and achieve a higher sales price.
It does not mean that you have to rebuild your kitchen, so even a medium loan that is affordable can make a big difference and bring a return on investment.
You may consider taking a loan to do some necessary home repair even if you are not thinking of selling your house. Basic maintenance is essential if you want to avoid paying for major repairs later on.
If the personal loan comes with a lower credit rate than your credit cards, taking a loan to pay off your credit cards would make a lot of sense, too.
Need money to pay for your wedding? Using your credit card would most likely add some cost to an already costly event – and who has that amount of cash laying around? That is why many people decide to take a personal loan to pay for the wedding and honeymoon.
Suppose that you want to start a business; you have done your research, you have skills and a great product or service, you just know you are on your way to success – but you cannot get start-up funding. If your chance of getting a business loan is very slim, would you take a personal loan to be a smart thing to do?
It most likely is. You can borrow up to $50,000, get the loan approved quickly, and use the personal loan for business. Typically, you will have 1 to 5 years to repay it. Make sure you compare the rates before you apply for that kind of a loan; depending on your credit score, the rates may vary dramatically (from 4% to 36%).
As you can see from those examples, taking a personal loan is a good thing to do when the funds will be spent to make money, and not just wasted on purchases you can live without.
Before applying for a loan, always ask yourself those questions above. Some of the things that you must consider are just common sense. If you weight all the pros and cons, you will only apply for loans when you need them to reduce your stress, not to add more drama to your life.