5 questions when considering a personal installment loan

Financial problems plague many people, no matter how responsible they are with money. You don’t have to be unemployed to struggle to make ends meet. In fact, many people work two jobs and still struggle to pay their bills as costs rise but wages remain low.

Plus, there are inevitably unforeseen costs that arise throughout the year, whether it’s medical bills, unforeseen events like weddings and funerals, or an urgent family trip to across the country.

If you’re struggling to make ends meet, you might be considering a personal loan with monthly installments. It is certainly not the last resort. On the contrary, the best installment loans come with reasonable rates and can open up opportunities for you.

However, you need to be sure to consider all variables. Ask yourself the following five questions when considering a personal installment loan.

1. What is the real cost of the loan?

When taking out an installment loan, it’s tempting to think of it in terms of monthly payments. Can I afford to pay it back every month? If so, I should go, right? Well, not quite.

It is important that you fully understand what the loan will cost you. This includes all fees associated with the loan, as well as any interest you can expect to pay. It’s not always easy to solve this problem on your own, but luckily there are some very handy loan calculators online.

Once you know the true cost of the loan, you need to decide if it’s worth it. If that seems excessive, ask yourself if there are better ways to meet your expenses.

2. How will your credit score affect it?

Contrary to popular belief, there are personal loans regardless of your credit quality or FICO score (your FICO score is a particular credit scoring system that determines how risky you are as a borrower). Some lending companies won’t ask you to disclose your credit score. However, a credit score is relevant to more than just determining whether a loan company will accept you.

Instead, lenders decide how much interest they’ll charge based on your credit score. They will vary the amount they are willing to give you based on your score and they may impose stricter conditions if your score is low.

If you have bad credit, you will almost certainly be hit with high interest rates. Check your credit score and read each company’s fine print about the impact it will have on your loan before you commit.

Installment loans can actually help you build a credit rating if you’re just starting out or need to catch up on past mistakes. If the actual cost is not too high, this can be a great strategy.

3. Is prepayment an option?

It is not uncommon for people to take out a loan to meet immediate needs. You may know that you will be able to pay it back in a month or two. However, payday loans and other short-term loans can be expensive. So a longer term installment loan seems like the best option. You expect to pay everything back much sooner than the agreed terms.

Unfortunately, it’s not that simple. Lenders make money from long-term loans due to accrued costs. They don’t necessarily allow you to prepay the loan, or they may charge a prepayment fee.

Find out if prepayment is an option and won’t cost you too much. Otherwise, consider short-term loans.

4. Will a larger loan save you money?

Contrary to all odds, a larger loan does not necessarily mean a more expensive loan. A larger loan opens up many more possibilities. While a small loan will help pay your bills, a large loan can give you options for earning money, either by investing or giving you the leeway to make bolder financial choices.

Of course, the number you get for the actual cost of the loan will be a major factor here. Although a large loan opens up options, a high cost can negate the benefits.

5. Should I consolidate?

If you have already opened a number of personal loans, you should ask yourself if another loan is really the solution. This might relieve you in the short term, but leave you struggling for the foreseeable future. It is better to know if consolidation is possible.

Consolidation takes all of your loans and consolidates them into one loan. This can be done at no cost to you, making it easier for you to pay everything off without a huge compounding interest rate.

Personal installment loans can create opportunities, but if you rely on them too often, you can dig yourself into a hole. Consider consolidation before opening a new loan. If that’s not an option, try to find alternatives.

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