Are you in need of some quick money for a short term expense? Or do you lack a ready asset (home, car, gold) that you can provide as security for a loan? Then maybe a personal loan is a good option for you. A personal loan is advantageous in that you can spend the money in any way you like. The lender does not place any restrictions on how you spend the money. Plus, there is relatively less documentation when applying for the loan since you are not providing any collateral.
The main disadvantage of taking a personal loan, however, is the higher interest rates. Since there is no collateral involved, lenders cover the risk of default by charging a higher interest rate. A personal loan can be the most expensive loan to take in terms of interest payments.
Here are 3 things to keep in mind when planning to take a personal loan:
1. Check your credit score: The first thing you should do if you plan to apply for a loan is to obtain a copy of your credit report and check your credit score. Since there is no collateral to safeguard against default, lenders rely heavily on your credit score and credit report when deciding whether to approve your application. It is good to have a score of 750 or above to stand a good chance of being approved. If you are rejected due to a low score, your credit score will drop even further with every rejection.
2. Evaluate the interest rate and your repayment capacity: Personal loans have higher interest rates than a home or auto loan. You should also decide whether you can afford the loan and whether you will be able to make all your repayments on time. Any missed or delayed payments can have an adverse effect on your credit score and make it difficult to obtain loans in the future.
3. Judge if the tenure is right for you: Typically, personal loans are for a relatively short period. Check if you will be able to repay your loan in full by the due date. Remember that if you opt for a longer repayment period, you will have to pay a higher interest rate. Choosing a shorter tenure can save a lot of money on interest payments, but you need to be confident that you can repay the amount within this shorter time period.