You know you are in need of financing and have already decided on getting a loan. But before making it final we would like you to consider a few things. The debt you take on when signing a loan will be with you for the next few years so you should never rush the decision.
It’s normal to feel nervous before signing for a personal loan even if you know that what you will use it for is worth it. However you can alleviate that stress by asking a few questions. Here is what you should ask yourself before signing for a loan:
1. How much do I actually need to borrow?
The first thing you should ask yourself is how much money do you really need to borrow to accomplish your goal. Most times lenders offer their potential borrowers the option to borrow more than they need. Having more money to play with may sound tempting but in truth it’s a really bad idea.
Yes you will have some play money after getting the loan but this will end up costing you further down the line. Avoid paying thousands of dollars in interest rate by only borrowing what you need.
2. Can I afford my monthly payments?
The second and possibly most important question you need to ask yourself is “Can i afford my monthly payments?”. If the answer to that question is no, then not only will you go through the next year with a huge amount of stress while barely scraping the bottom of the financial barrel but it will also make the reason why you got the loan a burden, not a pleasure.
Before signing determine whether your monthly payments will fit into your budget. As a rule of thumb, take your gross monthly income after taxes and all your monthly housing expenses. For safety it’s ideal to have your monthly expenses make up 36% or less of your monthly income.
3. How much will the loan cost in total?
It’s also important to be aware of how much the loan will cost at the end of your term. Some loans have upfront fees and others have closing costs as well. Mortgage loans for example have such costs, from property taxes to underwriting fees and can cost you thousands of dollars. Be sure to inquire into any extra costs and ask yourself if you can afford the entire loan on closing day.
4. How much does the loan cost each year?
When searching for loans, future borrowers tend to focus only on the interest rate instead of the annual percentage rate (APR). This figure will tell you how much the loan costs over the course of an entire year.
For example if you would want to take out a $10,000 over 60 months and are offered a 5% interest rate and 500$ upfront fee or an alternative with 7% interest rate then the second offer would be better even though the interest rate is higher. This is because the APR is 7.124% for the first offer and 7% for the second.
So when applying for a loan it’s better to take into consideration the APR, not the interest rate.