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10 Things to Consider When Taking Out a Personal Loan
New financial packages and tools have made taking out a personal loan extremely easy and convenient.
However, this ease should not prompt you to take out a personal loan when you really don't need one.
As with many decisions in life, you should think twice before adding a personal loan to your already existing debt. Therefore, here are a number of things you should think about long and hard before getting a personal loan:
1. Ask Yourself 'Do I Really Need a Personal Loan'?
First of all, you must ask yourself why you need to take out a personal loan in the first place. What kind of expenses do you hope it to cover? Are you trying to pay off an emergency healthcare bill, get your car repaired, or do you want to buy something new? Personal loans charge very high interest rates. Therefore, your expense should be well justified before you make the decision to sign a personal loan contract.
2. Try Asking Money from Friends or Family
Personal loans usually only provide small amounts to borrowers. Therefore, you might be able to get this amount from your trusted friend or your family. If you need $500 in a hurry, ask your mother or BFF if they can loan you that amount. Later, you will only have to repay the original $500, as no interest or service charges will be attached. So, borrow money from family or friends if you can instead.
3. Consider a Credit Union
Credit unions are local financial cooperatives. People who participate in a credit union are also its owners. Credit unions are known to offer lower interest rates to members compared to banks. Also, you can reason with credit union members more easily than with a traditional financial institution. Therefore, if you need a small amount, ask one of the credit unions in your local area. Don't consider a personal loan without doing this first.
4. Can Your Employer Give You a Cash Advance?
If you need some money now, you can always borrow it from yourself. Ask your employer kindly if you can borrow the amount you need from the following month's paycheck. If you are a diligent worker, there's no reason for your employer to deny your request. The amount you borrow now will be deducted from the next month's check. No charges will apply.
5. Calculate the Cost of the New Loan
Most borrowers don't know what they are getting into when they take out a personal loan. If you borrow $100 now, that will not be the amount you owe in the future. The amount you owe could rise up close to $500 or more once the interest and fees are calculated. So, make your own calculations. First see if you can repay the amount due with your current budget.
6. Consider Other Alternatives
There are number of alternatives to personal loans. Some are mentioned on this list like cash advances from your employer. If you need a significant amount, you can also borrow against an asset like your house. You will get better interest rates and terms with a conventional loan. So, always exhaust alternative means before resorting to a personal loan.
7. Negotiate with Lenders
If you are taking out a personal loan to pay off another debt, don't do so casually. Sinking deeper into debt doesn't really solve your existing debt problems. If you are getting a red notice, call that creditor and try to renegotiate the amount due. Ask for an extended grace period, loan forgiveness or a reduced amount. Do this before you shop for personal loans.
8. Consider Your Credit Score
Bad credit scores do not necessarily keep you from getting a personal loan. However, it's important to stop and ask if you should. If your credit score is low, that means you are seriously in debt. A personal loan will only worsen the situation. So, don't hastily borrow. Think carefully about what you need to do before you do it.
9. Does the Personal Loan Provider Have a Good Reputation?
Do not take out personal loans from shady agencies. They may charge you an arm and a leg in fees. Before you jump headfirst into a personal loan agreement, ask around about the lender. Search online for user reviews if possible. You can also contact your local government's consumer protection agency and ask them about the lender's rating.
10. Are You Being Denied Legal Recourse?
Carefully read the personal loan contract before you sign it. You should obtain a copy of the document to scrutinize it before signing. Some spurious lenders include a clause denying the debtors legal recourse if they are unable or unwilling to repay the debt. You must be able to sue the lender if the lender is charging you illegally high fees, if you are seriously unable to repay, or for any other legitimate reason. Therefore, do not enter legally-binding agreements that deny you a basic right to defend yourself in court.
As you can see, there are a number of things to consider before taking out a personal loan. Make sure you are well advised, clear headed and legally protected before getting a personal loan for any reason.