Do you need a personal loan during a crisis? Questions to ask yourself
Before applying for a personal loan, ask yourself these questions. (iStock)
In the past year, Congress has approved multiple coronavirus relief funding bills to help millions of Americans stay afloat. In March 2020, Congress passed the CARES Act, a $2.2 trillion coronavirus stimulus package providing relief for American workers and businesses dealing with the economic crisis. The act also included a moratorium on federal student loan payments. Former President Trump later signed a second coronavirus relief bill for $900 billion and Congress approved an additional $1.9 trillion relief bill on March 10.
Despite the government’s efforts, many people still need additional financial assistance to pay their bills and are considering getting a personal loan. However, before you take out a personal loan, do your research and ask yourself these five questions.
1. Is it a good idea to take out a personal loan?
You never know when you’ll get hit with an unplanned bill, but when it happens, it’s good to know your options. If you don’t have an emergency fund set up, a personal loan may help you cover rent, utilities and other bills. You may even be able to lower your financial outlay each month by consolidating debt into one lower payment.
Personal loans often come with lower interest rates and flexible repayment terms, making them an attractive alternative to credit cards. You can comparison shop and find personal loans with interest rates as low as 3.99% at Credible.
What’s more, repayment terms for personal loans usually range from one to six years. With a good credit score, you may find lower interest rates and longer payment terms which can lower your payment and give you time to regain your financial footing.
2. Will I qualify for a personal loan?
Many lenders are responding to the economic downturn by requiring higher income and credit scores from potential borrowers. Since most personal loans are unsecured by collateral, your loan approval will depend on your credit score, payment history and your debt-to-income (DTI) ratio, among other considerations.
If your credit score is good (670 or above), you may be able to get a personal debt consolidation loan with an interest rate lower than those with your credit cards.
If you would like to see what interest rate you can qualify for today, enter your necessary information into Credible’s free online calculator to get results right away.
3. Can I have more than one loan?
Although lending requirements vary from lender to lender, many lenders will allow borrowers to take out additional loans if they make on-time payments on the first loan. On the other hand, numerous online lenders explicitly prohibit borrowers from applying for more than one personal loan. If you want more than one loan, contact the lender to clarify prepayment terms.
Remember, the DTI ratio is one of the most significant factors loan underwriters consider during the approval process. Your DTI ratio will rise when you take out the first loan, making it more challenging to obtain a second loan if your DTI is over 36%.
4. How much should I borrow?
Just because a lender may approve you for a loan amount higher than the amount you need doesn’t mean it’s a good idea to take the maximum amount they offer. It makes little sense to borrow more money than you need and end up paying more in interest.
Review your budget to determine whether you can afford the loan payments. You can also use a personal loan calculator at Credible to find the best rates and determine how much the interest will cost you over the loan’s life.
5. What are some alternatives?
There are a few alternatives to borrowing that may be better to deal with financial hardship than installment loans.
0% APR credit card: If your credit is good or excellent, you may be able to get a 0% APR credit card and only pay interest if you carry a balance from month to month. In other words, if you pay off the balance during the introductory period, you’re effectively getting a short-term loan for free. However, the card is likely to have a high-interest rate once the 0% introductory period expires, so aim to pay it off before that date.
Payment plans and COVID-19 payment options: State and federal governments, as well as private companies, are offering forbearance and deferment programs to help those financially impacted by the coronavirus pandemic. That means you may be able to pause payments or make reduced payments for many of your bills, including your mortgage or rent, vehicle, credit cards, loans and utilities.
Next steps
While a personal loan can help you get through a financial crisis, you should only borrow the minimum amount you need. Reducing the amount you borrow is a wise move since you’ll pay less in interest, leaving you with more money for other things.
Understand the steps you need to take to get a low-interest personal loan, which starts with comparing the best lenders offering lower interest rates and longer repayment terms. An online marketplace like Credible makes it easy to compare these variables, multiple lenders and more in real-time, so you have the information you need to move forward.