Before You Take a Personal Loan – Questions to Ask Yourself
Choosing a lender often depends on your needs, and asking yourself the right questions can make the difference when trying to find a personal loan in Canada that works for you. In many situations it’s about more than the ARP, although a great interest rate probably tops the list for most desired when it comes to personal loans.
But what if you have emergency car repairs and need the funds fast, or think you might come into some money later and might want to pay off your loan early. These are just a few things to consider, along with some questions to ask yourself below before you think to apply.
How Much Do You Really Need To Borrow
You wouldn’t want to take more than you need when it comes to a personal loan, or you’ll be stuck with higher monthly payments and possibly a higher interest rate. In situations like home repairs or renovations where you don’t know in advance, you can do some homework to make an informed guess, if unsure what is needed upfront. Many Canadians with credit card debt find that a personal loan for debt consolidation can help them to better manage their money, and once the loan has been repaid, are able to put more money aside for the future.
How Much Can You Afford
This is one of the first things you should ask yourself, as you want to make sure that your monthly payments don’t disrupt your budget too much and the monthly payments fit within what you can afford. While you might find some lenders are willing to offer more than the amount you desire, it is advised that you focus on what the real needs of your original purpose for the loan and not be sidetracked by borrowing more and how else you can spend the money. Borrowing less means lower payments, and possibly being able to pay off sooner. You want to review your personal finances to determine if you have the cash flow to handle the additional expense of additional monthly payments for the duration of the loan terms.
How Much Will the Interest Be
Since the cost of borrowing is mostly based on interest rates, you want to make sure to look into what the amount would be. While you can take a longer term to lower monthly payments, the overall interest will increase on top of the principal amount borrowed. When comparing your options different lenders will not have the same offer. It also pays to look at the annual percentage rate (APR) of a loan as this can provide better insight into the cost of borrowing since it includes any other fees and costs involved.
How Long Should the Term Be
Depending on how much you can afford will affect the duration or term of the loan and will work best for your own situation. As previously mentioned, if you take a longer term, it can lower the payments but end up costing you more. While it is ideal to take the shortest term possible when borrowing, the loan payments should also fit within your budget as a monthly expense.
What Fees Are Involved
While many lenders might have additional charges like an origination fee, it’s important to be aware of these as they might influence who to borrow from beyond what the interest rate is. Such as whether they have an early payment penalty or something similar. Depending on the lender there can be additional fees when borrowing, which is important to know in advance. Personal loan fees other than the interest rate when you apply for and open your loan, when your funds are released, and even when repaying your loan.
If you’ve found a lender that interests you and met their eligibility requirements, the next step would be to complete an application. Be on the lookout for these potential fees prior to signing an agreement.
Application fee – this would typically be anywhere from $25 to $100
Origination fee – the average amount is from 1% to 6%
Prepayment penalty – about 2% to 5% of loan amount
Non-sufficient funds (NSF) – from $20 to $50
Payment protection insurance – varies, often 1% of loan amount
Not all lenders are the same, but you might come across some that include various administrative fees like brokerage fees, closing fees, commitment fees, document preparation fees, processing fees, paper copy fees, underwriting fees, electronic payment processing fees, late payment fees, payment convenience fees, prepayment fees and similar. Most personal loans or installment loans come with unavoidable fees, but it never hurts to check your options.
RELATED: How to Eliminate Credit Card Debt with Personal Loans
How Will My Credit Score Impact Loan Offers
When looking for a personal loan, it’s your credit score that usually has the most influence over whether you might be approved, how much you can get, and what interest rate. The higher your credit score, the more likely you are to be offered better interest rates. If the need for a loan isn’t urgent, it can be worthwhile to actually trying to improve your credit score before applying for a loan so you might qualify for even better interest rates.
RELATED: Fast Ways to Improve Your Credit Score
How Do I Get The Best Interest Rate
Since your credit score has so much to do with what interest rate you might qualify for when looking into personal loans, this is something you should know before you consider applying. If the need for a loan isn’t urgent, you have the opportunity to do some comparison shopping to look for the best rates. If your credit score is only fair or poor, there won’t be a lot to compare as you’ll be considered higher risk and have limited options. But when your credit score is good or excellent you’ll find a lot of different choices available.
How Soon Do You Need The Loan
Some lenders can provide the funds the same day or next business day, while others can take up to 10 business days. When you need funds quickly, this can be another consideration for which lender you might choose to go with. If you go to a bank it can often take a few weeks to go through the process, where borrowing online tends to be easier, and faster. But if it isn’t needed quickly, you have more opportunity to look around and compare what’s available.
What If I Have Bad Credit
It’s still possible to find a personal loan for bad credit. You just have to remember that this would mean that you are likely to be offered a higher interest rate if approved. But when you are able to get approved for a personal loan with lower interest rates than what you are currently paying, this can be a smart option that can help you to pay your debt off sooner, and pay less in interest overall.
What Other Options Are There
If you were considering a personal loan to consolidate your debt, a balance transfer credit card that allows you to pay zero interest for over a year can be another option. However, you need to be certain that you will be able to cover the payments and pay it off before the 0% APR promotional period ends or you will likely regret this choice. You might also look into a home equity loan, line of credit, borrow against your RRSP, or friends and family. If your loan needs are not urgent, you might even try saving up for it so you don’t have to pay interest.
RELATED: Personal Loan Mistakes to Avoid
What To Do Next
Weigh your options using the above suggestions to help you avoid financial trouble and determine your best move. A personal loan is a financial commitment that you want to manage and use responsible borrowing so that you are able to make your payments, not damage your credit score, and have it available to you again in the future if you need it. Just be sure not to be getting a loan for the wrong reasons when looking. Whether you live in Toronto, Vancouver, Calgary or somewhere else in Canada, finding personal loans to fit your needs starts with asking yourself the right questions.
More Questions to Ask:
- What is a Good Credit Score
- What is a Good Debt to Income Ratio
- How to Prequalify for a Personal Loan
- Ways People Can Use Personal Loans
- Personal Loans – What to Know Before You Apply
- 5 Things to Know When Looking for Personal Loans
- How a Personal Loan Can Help End Money Problems
- How Poor Credit Can Prevent Personal Loan Approval
- How a Personal Loan Can Help Pay Off Your Debt Faster