Many of us experience certain moments in our adult life where our finances come under strain and the knee-jerk reaction is to consider borrowing some more money in order to find a quick-fix to our money worries.
There are definitely pros and cons to taking out loans and the best approach is to try and evaluate when this might be a good idea and when you should avoid the temptation to borrow any more money.
Here is a look at some of the points to consider when deciding whether or not to get a personal loan to lessen your financial worries.
Working out how much you need
One of the first things that you should consider doing is work out how much money you actually need before applying for a loan that may be not enough or too much for your immediate needs.
Whilst it may be tempting to round up the figures and borrow a larger amount than you think you need, this decision has implications, as you are going to be increasing your repayments and paying more interest back to the lender.
If you are experiencing a shortfall in your finances each month, draw up a list of your monthly income and expenditure so that you can see exactly where your money is currently going and how much you can realistically afford to repay on a loan.
If you plan to clear some other debts to consolidate your borrowings, work out how much you are currently paying each month, how much you need to borrow to clear these debts, and how much the likely repayments are going to be for the new loan.
Working out how much you actually need and whether you can afford the repayments on a new loan is a good place to start.
The amount of interest being charged will vary between lenders and also be based on what type of loan you are applying for as well as your perceived credit risk.
The interest rate charged on personal loans will normally be higher than on a secured loan, which involves providing your property as security against you defaulting on the repayments.
Home equity and secured loans are normally for larger sums of money and whilst the lower interest rate can seem attractive in comparison to some personal loan rates, you should always remember that you could lose your home if you don’t pay back a secured loan.
Another factor that influences the interest rate you are being charged will be your credit score.
You should check your credit score regularly and see what lenders and other financial institutions are saying about you and your current levels of debt. If you are not up to date with some of your payments or already have high levels of borrowing, this will be reflected in your credit score and can result in you being asked to pay a higher rate of interest on a new loan, or being refused any further credit.
Try to get your personal finances in order as best you can before making an application for a loan, or at least check your credit score to see what your chances are or getting the money you are applying for.
Check the small print
Many of us are understandably seduced by a headline-grabbing rate and are tempted to take out a personal loan with the lender who is simply offering the lowest interest rate.
The problem with some deals is that when you start reading through the terms and conditions of your proposed loan agreement, there might be a whole range of charges and penalties that they could apply, which could turn out to make the loan more expensive than one with a slightly higher interest rate.
Not many of us are that good at reading through the small print of loan agreements or any sort of paperwork we are being asked to sign, normally because it is several pages of legal jargon, so we tend to scroll down to the bottom and just sign.
This could be an expensive mistake.
Things to look out for are prepayment penalties, which might involve charging you extra if you decide to pay off the loan early or they might be called exit penalties. Also check for charges for missing a payment or any administration charges they make, as these can make a substantial difference to the overall cost of your loan.
You might be worrying about your financial situation, but it still makes sense to take the time to decide if a loan is right for you and exactly how much you need and can afford to borrow, before you make the application.
Karen Jenkins has enjoyed a career in consumer finance and likes to be able to pass on her insights and observations to an online audience. Karen writes frequently for a number of relevant websites.