Is a personal loan right for me?

There are various reasons why you might consider applying for a personal loan: perhaps you’d like to upgrade your car, go on an overseas trip, plan a wedding, pay for medical expenses, or consolidate your debts.

In truth, a personal loan can be used for just about anything—the question therefore is whether or not a personal loan is right for you. So, if you’re trying to figure out whether or not you should apply for a personal loan, here are a few things to consider.

Do I really need credit?

There are many valid reasons to apply for credit, from purchasing a new car to paying for a dream holiday. A personal loan can provide you with the funds you need to accomplish such goals as well as the flexibility to repay your debt over a manageable period of time. However, before applying for credit, it’s prudent to make sure you have a clear purpose in mind: this can help you avoid borrowing more money than you need.

Am I likely to qualify for a personal loan?

Personal loan providers are very selective when deciding to whom they will lend money: this allows them to reduce the risk that a borrower will default on their loan or make a late repayment. As a potential borrower yourself, you should carefully consider whether you’re likely to qualify for a loan. Do you have a positive credit history? Are you employed or in possession of significant assets? Bear in mind that multiple unsuccessful attempts to apply for a loan could have an adverse effect on your credit score.

Can I afford to repay a personal loan?

This could be the most important question to ask yourself before applying for a personal loan: will you be able to manage the repayment schedule (including not only the sum you have borrowed but interest charged on that amount)?

Of course, if it’s clear that you will struggle to repay a personal loan, it’s unlikely that you’ll be approved for one. Alternatively, you might qualify for a loan with high interest rates that reflect your risk profile. Know that once you’ve committed to a loan, it’s important that you make all of your repayments on time to avoid penalties, such as late payment fees or a negative credit report.

Is a personal loan the best credit option for me?

Personal loans are usually made for amounts of $2,000 to $45,000: this generally makes them more suitable for certain purchases, such as vehicles, holidays, or small renovations, but ill-suited to major investments, such as a property.

If you’re considering a purchase in the $2,000 to $45,000 range, you may find yourself wondering if it would be better to use a credit card. In general, personal loans can be a better option if you require a larger sum of money that you know you won’t be able to repay all at once. Credit cards can be helpful for smaller expenses that you can pay back during the interest-free period. However, you should keep in mind that the interest rates for credit cards can sometimes be extremely high—if you know you won’t be able to repay your debt quickly, then a personal loan with competitive interest rates might be a much more affordable option.

Can I find a personal loan that’s flexible and competitive?

The general rule with all loans is that the quicker you can pay it off, the less it will cost you in interest. However, some personal loan providers don’t allow borrowers to make early or additional payments. Alternatively, they may permit such repayments but impose a fee or penalty. Ideally, you will retain control over how quickly you can repay your debt: this gives you the flexibility you need to minimise the amount of interest you pay.

This information does not constitute financial advice and you should consider whether it is appropriate to your circumstances before you act in reliance on it. Any opinions, forecasts or recommendations reflect the judgement and assumptions of RateSetter as at the date of publication and may later change without notice.