What to consider when taking a personal loan

What to consider when taking a personal loan
With the new year on the horizon, you may be thinking of taking out a personal loan to help with a resolution, whether it be getting out of debt, making some home improvements, going on vacation or making a major purchase like buying a new car. If you are planning to take out a personal loan, here are some valuable tips to keep in mind before going for one.

Check out online loans Online loans really have taken on a life of their own. Online lenders can offer lower rates for borrowers thanks to few overhead expenses, meaning more money in your pocket. Shop around and try find a lender who can provide a loan that is best tailored to your needs.

Beware of scammers With the advent of more lenders in the personal loan arena comes the opportunity for scammers to muscle in on the action and pounce on unsuspecting victims. Red flags include lenders who show little interest in your personal financial history, or those who may ask you to put up a deposit as a guarantee against a loan. Be very careful who you give your personal information to.

Work on your credit score Whether you're looking for a loan online or through a brick-and-mortar bank or credit union, a good credit score will ensure better rates. A not-so-good credit rating will make it very difficult to obtain a loan. Credit scores are easily obtainable (most banks or credit card companies provide them to their customers), and you can get a free credit report from Experian, Equifax and TransUnion annually.

Avoid a payday loan A payday loan is mostly used by a borrower to cover ordinary living expenses over the course of a few months. Helpful for those who have bad credit or financial problems, it does not require a traditional credit check. However, it is much more expensive than other methods of borrowing money. The annual percentage rate (APR) on a payday loan averages about 400 percent. Therefore, you would be better off using a credit card (APR 9 to 30 percent) or tapping into your savings.

Can you pay it back comfortably? Before doing anything, look deep into your financial situation and calculate how much you think you can take on that you can comfortably pay back. Many's a story told of borrowers being loaned more than they can handle, resulting in payments that are just too hard to pay back.

Read the fine print So you've found a personal loan you think will work for you and you're ready to sign off. Before you do anything, make sure you take some time to read over the details of your agreement. What happens if you miss a pay date, for example? Will it trigger a fee or result in a penalty rate that may cause the loan to be more costly over time?