Having an emergency fund or any savings is essential for keeping yourself financially secure. Never has this become more relevant than during the onset of the pandemic, when people faced massive unemployment and economic uncertainty.
One way to meet your financial needs is to take out a personal loan. In Canada, non-mortgage borrowing increased by 0.6 percent last year, reaching $802.8 billion.
Personal loans offer many benefits. Aside from helping you handle your expenses; they could also increase your credit limit.
However, this financial obligation requires careful consideration to ensure that it helps your financial situation and does not become an added burden. Below are five questions to ask to help you assess whether you should take out a personal loan.
1. How Much Do I Need?
Determine how much you need to borrow. If it is just a few hundred dollars, you might consider saving, borrowing from a friend, or finding Short term loans in Ontario. The province also offers different forms of financial assistance for those in need.
Make sure to borrow only the amount you need. Lending institutions and creditors might try to talk you into taking out a larger loan but politely refuse. A smaller loan is much easier to pay back.
2. How Much Is the Interest Rate?
Interest rates often rely on several factors, such as your credit score, the loan amount, and the amount of time you’ll have to pay it back.
If your credit score isn’t so good and you take out a long-term loan, you might have to pay higher interest rates.
You could shop around and ask different creditors about the terms of their loans. Compare their interest rates to your needs and payment capabilities and decide from there.
3. How Long Do I Have To Pay It Back?
Most personal loans often offer terms of six months to a few years, depending on the loan amount. The longer the timeline, the higher the interest rate usually is. If you can, it would be wiser to take out short-term loans to save on interest rates.
Payday loans are the exception to this general rule. These unsecured loans allow you to take out loans faster, but they also have higher interest rates and require payment usually within a month.
4. Can I Afford the Monthly Payment?
When applying for a personal loan, you are usually given the option to choose among different payment plans. It’s best to choose a plan that suits your income level.
It is highly recommended to only spend 36 to 43 percent of your monthly income to pay off your debts. Lenders often look at your debt-to-income ratio before approving your application to ensure you can make your monthly payments.
Ensure you can afford your monthly payments before signing up for a personal loan. Missing a payment could lead to additional fees and damage your credit score.
5. Is the Lender Trustworthy?
Government regulations or industry regulatory boards often guide well-known banks and lenders. This ensures that they provide high-quality services and do not resort to predatory lending tactics.
Do your due diligence when it comes to selecting a lender, and make sure to read through your contract. If you get a bad feeling or feel pressured to take out a larger loan than necessary, try looking elsewhere.
Toward Responsible Borrowing
A personal loan could provide you with much-needed financial relief or a boost to your credit score.
However, it is still a financial obligation, and it is necessary to review your decision thoroughly. This practice will ensure that you reap the benefits of a personal loan without incurring significant burdens.