Why Consider a Personal Loan
Maybe you are looking to do large-scale renovations to your house; you want to buy a new car, or are you looking for a loan to merge your existing high-interest loans. Whatever the circumstances, you need the money, and you don’t have the time to save. But how do you get it? Are you going to be red on your checking account, request an (extra) credit card, or are you going to increase your mortgage? The cheapest method to borrow money would be to take out a personal loan.
What is a personal loan?
A personal loan (or personal credit) is often borrowed from a bank or another (online) lender. The money from the loan is transferred in one go, after which you can make your purchase. You repay the loan in equal monthly payments with a fixed interest rate. In contrast to revolving credit, personal loans have a set payment term and often also lower interest rates. You, therefore, repay a fixed amount each month.
What is a personal loan used for?
The primary loan objectives for which a personal loan is taken out are buying a car, kitchen, holiday home, a renovation, medical costs, or other major purchases. The primary purpose why a personal loan is taken out is that the term of the loan is fixed, and you are no longer paying for a loan while the underlying product for which you borrowed (for example, a car) is no longer in your possession. If you take out a personal loan, you can often also reduce your monthly payments and possibly save interest on existing loans.
What information does the lender need to take out a personal loan?
To apply for a personal loan, you must be able to submit some information to the lender. This is usually about:
– Your personal information (name and address)
– Purpose of the loan
– Your living situation (rental property, owner-occupied property)
– Your marital status
– Children living at home or not
– Your housing costs information about your profession (employer, wage, date of employment, permanent/temporary contract)
– Retired/incapacitated for work
– Are you registered blacklisted, and if so, are there are still ongoing loans that continue to run after taking out new credit
Compare providers and products
Don’t make a decision too quickly. At some stores and websites, you can purchase an installment. Compare the offer that you get there with other loans. Often the interest for a personal loan at a bank is lower. Are you buying a car? Do not automatically accept the seller’s offer. See if you can get a loan with better conditions somewhere else. In most cases, it’s better to get a personal loan from your bank or other loan providers than to pay anything on installments with an attached loan offered by the seller.
Read the conditions
In addition to interest and duration, other terms are essential. Avoid having to pay a commission or origination fee in advance in the case of an online loan. See if you can pay off the loan in the meantime penalty-free. That is often not possible, because the lender misses out on interest payments. Are you concluding a lease-purchase for a car, or are you going to lease? Then see what happens at the end of the term. Is the vehicle yours then, or can you take it over for a fixed amount?
Check if you can continue to pay the costs if something happens
Can you still bear the costs if something changes in your income? For example, dismissal or incapacity for work. Or if something changes in your situation, such as divorce. You can also take out a life insurance policy with which your next of kin can pay off the loan in the unfortunate case you would die. Sometimes a term life insurance is standard with a loan
Most loans are registered with credit bureaus. Banks and other lenders can check there whether you have different loans and whether you have had payment arrears. They also do this when you take out a mortgage. Keep in mind that having loans means that the maximum mortgage that you can get when you want to buy a house is lower, depending on your credit score.
Personal loan versus revolving credit
A personal loan is usually the right choice if you need one-off money, for example, if you want to buy a car or motorcycle. If you borrow money to renovate your owner-occupied home, you can take advantage of a tax credit with a personal loan. A personal loan gives you security; you have a fixed interest rate, and you cannot re-take the repaid part of your loan. This way, you know exactly when your loan is repaid and what you pay per month for your loan.
Revolving credit is most suitable if you want extra money. You agree on a credit limit with the lender. You can withdraw cash up to this limit, and you only pay interest on the part you have withdrawn. If you have (partially) paid off your loan, you can withdraw that money again. The interest rate of revolving credit is variable but usually lower than the interest rate for a personal loan.
So, let’s recap. When do you need to consider a personal loan? When you need to finance something expensive like a new car, home renovation, medical expenses, or an entirely new property (in the form of a mortgage). How do you consider a personal loan? When its rates and terms are better than revolving credit and taking out an extra credit card. Why consider a personal loan? Because they are generally the cheapest form of borrowing money and widely available both online and offline through various financial institutions and banks.