Questions to Ask Before Taking a Personal Loan (Forbrukslån)
Posted On May 10, 2022
Remember that a personal loan is a perfect alternative to credit cards, especially if you wish to save money on the interest rate and make a large purchase. At the same time, they are growing in popularity since more than twenty million people are using their rewards each year.
Of course, before you make up your mind, it is vital to create a thorough repayment plan. Besides, it would be best to think about reasons to get it, including home improvement, debt consolidation, an emergency expense, or purchasing expensive appliances. By entering here, you will learn how to take advantage of personal loan to boost your business.
Therefore, you should ask yourself a few questions and answer them thoroughly before applying.
How Much Do You Need?
Before taking a personal loan, the initial step is to determine how much money you need for the process. The smallest loans are between five hundred and thousand dollars, depending on the lender you choose. Suppose you need a lower amount, we recommend you to choose alternative ways.
You can take advantage of credit unions which will provide you with smaller amounts than banks. That way, you can borrow as little as six hundred dollars.
Should You Pay Debt Directly or Get a Lump Sum and Do It Yourself?
As soon as you borrow the money from a lending institution, they will deliver the lump sum to your bank account, which is vital to remember. Suppose you wish to use the money for debt consolidation. In that case, you can ask lenders to send funds directly to your creditors, meaning you can skip taking money and repaying everything by yourself.
On the other hand, you may prefer a hands-on approach, meaning you will use the money for something else than paying off the debt. Therefore, you should get the lump sum from the account and use it for your preferences and needs.
How Long Will You Pay for It?
Remember that you must start repaying the amount you have taken in monthly installments after getting a lump sum. At the same time, the common repayment term is between one and seven years, similarly mentioned at the beginning.
Remember that monthly payments and interest rates will change depending on your choice. For instance, loans with shorter lengths feature low-interest rates but higher monthly installments. On the other hand, the more you prolong the repayment, the higher your spending on interest, which is vital to understand.
How Much Will You Pay in Interest?
The interest rate depends on numerous factors, including the loan amount, the time you will have to repay everything, and your credit score. At the same time, they can be as low as four percent and reach thirty-six percent, which is the highest one possible.
You will get the lowest rate possible with an excellent or perfect credit score, especially choosing the shortest repayment length.
According to recent reports, the average APR for two-year personal loans is ten percent. This is perfect for people that wish to use the amount to deal with credit card debt, mainly because they come at two times higher rates. At the same time, you should know that personal loans come with fixed interest rates, meaning the percentage will stay the same.
Can You Afford It?
As soon as you decide to apply for a personal loan, you will get a chance to choose the best repayment plan that will work for your cash flow and income levels. Lenders will provide you with an incentive for autopay, which is vital to remember. As a result, you can reduce the APR by 0.50%.
Remember that some people prefer to make monthly payments as low as possible, meaning they will choose a longer-term than other options. On the other hand, you can choose to repay the entire loan faster than others, which will increase your monthly installment.
When you decide to choose a low monthly payment and extended repayment term, you will get higher interest rates. Although the installments will remain small, you will pay a more significant amount throughout the loan’s life.
It is vital to remember that borrowers should avoid spending more than forty-three percent on debt, including car loans, mortgages, and personal repayments. Therefore, if your monthly income is four thousand dollars, you should keep debt payments under $1700.
Remember that mortgage lenders will deny people with higher than forty-three percent debt-to-income ratios. Still, personal loan lenders are more forgiving, especially if you have a high credit score and proof of regular income.
Suppose you think that you can temporarily handle high payments to save interest. You may wish to stretch the ratio, especially if you do not have enough income to manage significant monthly expenses.
It is more challenging to get approved with a debt-to-income ratio above forty percent, meaning you should enter a point of potential financial problems. Therefore, you should do it as a temporary measure and have a safety net such as an emergency fund or a partner’s income.
Does a Personal Loan Feature Fees?
You should know that lenders will charge you origination or sing-up fees, an ordinary expense. Still, you do not have to think about other charges altogether.
An origination fee is the upfront charge your lenders will subtract from your loan to pay for processing and administration expenses. The percentage is between 1% and 5% of the overall amount you wish to get, but some lenders will charge you a flat amount.
Therefore, if you get a five thousand dollars with a five percent of entry-fee, you will receive only $4750 because five hundred will go to your lender as the percentage you must handle. We recommend you find a lender without origination fees altogether.
Do You Have a Reliable Credit Score?
Before you decide to apply for a personal loan, you should understand the importance of credit rating and score, determining whether you can qualify. Most lenders will choose applicants with reliable credit scores, especially if you choose a bank.
Still, people with an existing relationship with a bank can get approval for a better deal, especially if they have a history of paying bills on time and following the terms of past accounts and loans.
Credit unions may offer you low-interest rates on personal loans, especially if you have an excellent credit rating. However, it would be best to become a member, meaning you should open a savings account before applying for the amount you wish to borrow.
You can also choose P2P or peer-to-peer loan options. You will use various platforms where individual lenders and borrowers can meet and discuss the best terms and opportunities possible. Still, you are more likely to get the better terms and rates with a good credit score, which is vital to remember.
What Choices Do You Have?
You can choose a balance transfer card for repaying the high-interest debt. Since they come with a limited-time 0% APR, a balance transfer card will offer you two years of interest-free options that will save you hundreds of dollars.
At the same time, everything depends on your specific situation, meaning you can transfer more than a single credit card into a new one, but you must follow the credit limit you can get.
Balance transfer cards (søk Forbrukslån) come with a few drawbacks, including transfer limits, which are lower than regular cards. At the same time, you must pay fees for each transfer, which is three percent. Of course, you may get a no-fee counterpart, which will provide you with peace of mind.
How Soon Do You Need the Amount?
It would be best to remember that some lenders will deliver funds on the same day after approval. Others will do it the next business day, which is vital. Some require ten business days, which is another crucial consideration to remember.
Suppose fast access to money is essential for your needs. In that case, we recommend you ask about the speed of delivery beforehand.
How Does a Personal Loan Affect Your Credit Score?
Since you will get an installment credit, you should know that they function opposite to revolving credit such as credit cards. However, having them in your profile can increase your score.
A diverse credit combination is a perfect option that will highlight a rich history. Some experts state that implementing another installment loan like a mortgage or car can help you boost the score. However, it is vital to get it only when you need it.
The simplest way to ensure you maintain and boost your credit score is to follow two essential factors: credit utilization and on-time payments. Although an installment loan is not as effective as a credit card for boosting your score, you will increase in the future.
You can make a difference when you pay off the revolving debt and avoid spending under ten percent of available credit. Still, you should know that credit cards come with high interest rates, which is why personal loans are way better alternatives.