5 To-Do’s Before Taking Out a Personal Loan
It’s the classic financial dilemma: you’ve got a home improvement project you’d like to start or maybe you have some unexpected medical bills, but you don’t want to dip into your savings to cover the expenses.
If you have good credit, a personal loan could be the answer. But there’s a lot to consider, especially if you’re paying off student loans while also trying to build a solid nest egg. Here’s a five-point plan to help you out:
1. Decide if a personal loan is really the ticket
In theory, a personal loan can be used for anything; in practice, though, it’s more suited to some uses than others. For example, major purchases that won’t offer a financial return, such as jewelry, a wedding or a European vacation, are not great uses for a personal loan. When you take out a loan, your monthly payments will include interest. So avoid paying that interest by saving up for these types of purchases instead.
If you need to cover a smaller expense, like a new TV or espresso machine, using a credit card makes more sense than turning to a personal loan. Even though the interest rate on a credit card is typically higher than on a personal loan, you can pay off less expensive items off over a short period of time, accruing less interest in the long run—or even no interest. Remember, when you use a credit card, you aren’t charged interest until 30 days after your purchase.
For larger expenses that double as investments in your financial or physical health, or in your career and home, a personal loan is a great solution. Use it to:
- Consolidate credit card debt. Average credit card interest rates range from around 13% to 23%, but personal loan rates can be much lower. Using a low-interest personal loan for credit card debt consolidation could save you thousands.
- Make a home improvement. A personal loan is a great option for a home improvement project that’s just out-of-reach of your budget. And it could pay for itself down the road if you sell your home.
- Pay for large or unexpected medical bills. Using a personal loan to pay health expenses is a smart alternative when the monthly payments attached are more manageable than the payments demanded by a doctor or hospital.
- Pay for moving expenses to advance your career. Expenses attached to career success are great investments. Moving to take a better job, for example, could be key to increasing your earning potential.
Once you know that a personal loan is for you, it’s time to be uber-responsible and do some pre-application homework. Take these steps:
2. Determine exactly how much you need to borrow
Your high credit score is valuable, and not something you want to damage. A solid loan strategy will help you maintain it. So, plan on borrowing only as much as you need, and know exactly what you can afford to pay monthly, so there’s no risk of overextending yourself.
3. Choose the type of loan you want
There are two types of personal loans—secured and unsecured. A secured loan requires you to put up assets, such as property or stocks, as collateral, and it comes with a lower interest rate because it presents a lower risk to the lender. But there’s a serious downside if you fail to make your monthly payments: You could lose the assets you’ve put on the line. An unsecured loan, on the other hand, is granted based on your credit history rather than on your assets.
4. Research lenders and ask the right questions
Choosing the right lender can save you thousands in interest payments and fees. So take a close look at your options to determine the lender and loan terms that best suit your needs. Once you’ve narrowed your choices down, ask lenders these key questions:
- Can I borrow the exact amount I need? Many lenders only offer loan amounts up to $40,000. But SoFi offers loans up to $100,000, so there’s a good chance you’ll get the amount you require.
- What’s the best interest rate you can offer me, and can I sign up for automatic payments? Interest rates on personal loans can be over 30%. SoFi’s rates are some of the lowest—from just 5.95% fixed APR. Plus, if you sign up for Autopay, SoFi discounts your rate 0.25%.
- What loan term best suits my goals? Personal loan terms can range from six months to 7 years, depending on the lender. SoFi offers 3, 5, and 7-year terms.
- Are origination fees or prepayment penalties attached to the loan? Some lenders charge an origination fee of 1% to 6% of the loan just to process your application, and/or a prepayment penalty when you pay off your loan ahead of schedule. SoFi doesn’t do things like that —what you see is what you get.
- What if I lose my job and can’t make payments for a few months? Missed payments could lower your credit score, incur late fees, or even involve collections agencies or a lawsuit. SoFi personal loans include unemployment protection, allowing you to suspend your monthly payments for up to 12 months (though interest will continue to accrue). Plus, you’re eligible to receive job placement assistance in the meantime.
5. Crush debt faster
With your questions answered and your loan secured, you’re ready to embark on your project or pay some big bills. As you do, remember to stick to your budget and keep your spending in check. The last thing you want to do is take on more debt.
If you receive a raise or find yourself with a few extra bucks at the end of each month, think about making larger payments and applying the extra amount directly to your loan principal. Get a year-end bonus? Use it to help pay off your loan months or even years early. Pro-tip: making a one-off payment on the day your auto-pay bill is due ensures that 100% of that payment goes towards paying down the principle of the loan.
With a low rate and monthly payment, a SoFi personal loan can help you pay off high-interest credit card debt, increase the value of your home, or even help you move forward (literally) in your career.