Are personal loans ever a good idea? Ask yourself this.

By giffgaff
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Ever thought about getting a loan for a little extra cash. Here’s breakdown of when a loan is a good idea.

There are many reasons why you may consider getting a personal loan. Some will be absolute necessities, such as a renovating your home, while others will be more casual, such as financing a once in a lifetime trip around the world. You could even get a loan for that trip to Las Vegas you have been planning for years!

The bankers are hoarding all of this money, so why don’t you make the most of it? Having said this, you do need to have a good think about getting a loan. You’ll need to decide if you really need this loan or if that impulse buy is truly worth it in the long run.

Personal loans are the most flexible sort of financing out there. While the lender will ask you about what the loan is going to be used for, once you have the money in your account, you can do with it what you please. If you wanted to, you could even just leave it untouched and marvel at your pretty bank account!

A personal loan is unsecured (not backed by any of your assets for collateral), so you are potentially  going to pay a higher interest rate on it.

When you are thinking about getting a personal loan, there are a few questions that you need to ask yourself.

1. How much do I actually need?

Before you go to the bank to borrow some of their of cash, you will need to decide exactly how much you need to borrow. There is no point borrowing extra ‘just in case you need it.’ Having an exact figure and a breakdown of where the money will be used shows the bank that you have a clear plan for the money, making them a lot more likely to accept your application.

2. Can you afford to pay it back each month?

You need to be able to have a plan for meeting monthly repayments. If you don’t have the money to pay for whatever you’re buying now, are you sure you can in the future? Will your income rise in the near future or your expenses fall sufficiently so you will have the means to meet the repayments? Here is a handy calculator that you can use to help manage your repayments.

3. How will this loan affect your current debts?

It is usually a bad idea stacking multiple loans on top of one another. This can get out of hand very quickly. Will an additional form of debt stretch your means too much? Here is a useful tool that will help you examine how additional debts will affect your current repayments schedule. Not sure which loan option is best for you? - here is a article that will cover it!

4. Is a loan right for you?

Sometimes a personal loan may not be the best option for you. There are many different financing options out there, so find one that suits your individual needs. Key things to ask yourself to check - to help, here's an article on 5 golden rules.

What if I only need to borrow for a very short duration?

Credit Card: You can utilise interest free deals when you borrow in the short term and some will have similar favourable offers. Ever wonder whether a loan is better than a credit card? Don't get yourself in a pickle, read this to see the pro's & con's! Also if you want to know when a credit card is a good idea, read this article.

 

What if I want to borrow money and pay back a fixed payment each month?

Personal loan: When you are dealing with a slightly longer duration, this will usually be cheaper than a credit card. Your credit record will determine the interest rates you pay.

 

What if I need a small amount of cash in the short run?

Overdraft: A lot of banks offer an interest free overdraft for certain limits on current accounts.

What if I want to pay off existing debts as straightforward and cheaply as possible?

Debt consolidation loan: by bringing all of your debts into a single loan, you can pay less on a monthly basis. It also makes the process easier as everything is in one place. See our article on debt consolidation.

 

What if I need to borrow but the bank won’t lend me anything?

Credit Union: Credit unions are normally a good option when your bank won’t help you. They serve the community in a non-for-profit fashion.

 

What if I can’t get any more credit but need to pay living expenses and debts?

Help from your local authority: The Social Fund or a similar authority may help you in the short run by providing an interest free loan. You may meet the requirements if you have a suitably low income and are in dire trouble.

Top Takeaway

There are plenty of options when contemplating borrowing money. The key is to do your research, understand what you want from the cash you’re borrowing, how long you need it for and finding which is the best option for you. If you're not keen on the idea of a personal loan - here are some alternatives!

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