Cash flow can be a problem for many people. And one solution to pay off an unexpected amount of money — say for medical bills, travel, tuition, etc -- can be personal loans.
But when you opt to borrowing to fulfil a need, it is important to think not only of how to get out of the immediate trouble, but of how you don’t fall into future ones. Your first concern should be whether you will be able to pay off the loan amount. But to determine the right answer to this question, you should be aware of how much you will be able to borrow, the term of your loan, and any other costs and charges that will come with your loan in addition to the interest.
To do so, consider the following points.
Loan amount
Think of a situation where you need Dh20,000. Wanting this amount of money doesn’t mean that you will be able to borrow the entire amount from a bank or you will be able to repay it combined with interest and other fees. Your lender probably will look into your financial details, including your employment status and length, household income and other debts as well as any available information regarding your credit record. For example, if you’ve been behind on your credit cards or your auto loan, you probably will have a hard time getting any additional debt.
But if you’re not and you’re able to present yourself as a good candidate with a high probability to repay your loan, your bank still will evaluate your loan amount based on the mentioned details. Whether the bank offers you all the money you need or more, you need to use your best judgement to determine how much you’ll be able to handle based on the final monthly payment.
Interest rates
Interest rates vary from lender to lender and from one loan type to another, in addition to the factors that are related to your own record. That is why it is important that you personally shop your rates to know what you will be able to get. Remember this rate will impact your monthly payment. In addition, you must understand how the interest amount is calculated.
Before you sign the dotted line, ask for a detailed explanation of the interest rate calculation, how much the total loan amount will be, and how both change — if they do — in case you change your monthly payment and loan term. In short, don’t take the numbers for granted. In most cases, borrowed money can be pretty expensive, and you will need to know what you’re getting yourself into before you commit.
Other costs
Interest is not the only cost that comes with taking out a loan. Banks may have fees, charges and prepayment penalties. You must know the specific of these costs. In particular, if you’re planning to reduce your monthly payment by taking the loan on a longer term — say 72 months — think of the odds of you having to settle the loan earlier. Do you really want this six-year commitment?
Other costs that might not be pronounced and hard to foresee include the unfortunate case of being unable to pay — i.e. default. Although you may not intend to do so, know what the procedure will be, how much it will cost you and what the consequences are. If you’re asked to sign a blank check, which is a common practice by many banks, would your bank pursue you for the outstanding amount or the entire balance? The answers to these questions could help you determine whether getting this loan is a good idea in the first place or not.
Finally, if you’re setting up auto monthly payment, check with your bank about the costs of overdraft. In all cases, try to set the monthly payment days after your typical payday to avoid this situation if your pay is delayed for one reason or another.
Rania Oteify, a former Gulf News Business Features Editor, is a Seattle-based editor.
Getting personal loans
Borrow what you afford to repay
Understand costs and rates
Know how to avoid extra charges
Select the right loan term to avoid prepayment
R.O.