If you are looking to utilize a personal loan for the first time, computing how much to apply for and for what term (length of time) can be a difficult decision to make. The information featured will help make the process of determining how much to borrow and for how long simpler. The last thing you will want to do is not be able to afford payments and end up defaulting. Learn more about the consequences of defaulting.
Borrowing more may be a good idea.
Even experienced borrowers are often totally unaware that money can be saved the more you borrow. Interest rates associated with loan amounts of smaller durations are typically higher than those of larger loans. So, applying for more may be a better choice for you ONLY if you think you will be able to steer clear of the enticement of spending that extra money you receive. A good idea would be take any funds that are beyond your needed borrowing amount and place them into a CD with attractable interest rates or a money market bank account.
Borrowing more than you need to save on loan costs may be a risk that you are just not wanting to take. If this is the case, you'll need to do a few things for determining what loan payment will fit into your monthly budget. The first thing you'll need to do is create a list of all your monthly expenses including fixed expenses (necessitates like bills, putting food on the table, etc.) and discretionary expenses (things that are not needed for survival like going out to eat, buying toys, etc). Make sure you include all of your monthly obligatory expenses as well as daily costs (gas, lunch at work, etc.). The next step would be to subtract the total sum of these costs from the amount of net income you are bringing home every month. The amount left over IS NOT what you are going to be able to afford as your loan payment. That would mean you are leaving yourself with no money for any unexpected costs that may arise during the month or routine costs that end up costing more than expected for whatever reason. We suggest that 70-75% of the monies left over can be utilized for your monthly loan obligations. For example, if you have $1500 left over after computing your budget, then you have $1050 - $1125 (70-75%) for your loan payments.
One thing to take into consideration if you are looking to eliminate credit card debt with a personal loan is that credit card interest rates are typically higher than personal loan rates. Therefore, don't forget to compute the money you will be saving from credit card interest rates when determining your affordability.
Determining your borrowing amount.
Once you figure out how much money you have to spend every month for your loan, you will need to figure out exactly the amount you are going to be applying for. The purpose of your loan is going to be the key determining factor. But, it is going to be important that you not only analyze the base cost of your loan purpose, but include any potential extra costs associated. For example, if you are looking for a loan for a vacation, there are going to be many variables needed to be included for determining the final borrowing amount (plane tickets, hotel, airport transfers, food, drinks, site seeing, etc). Another example would be if you are looking to make some repair to your home. A contractor may give you an initial quote but often, when contractors get deeper involved in the work, they find additional aspects/issues that are going to be needed to be fixed (refurbishing a bathroom and once walls are knocked down, mold is discovered from a leaky pipe). There is no set rule as to how much extra money to plan for unexpected additional costs for your borrowing amount. But, it is better to borrow a little more than to be short. As mentioned above, the extra money can be thrown into a high interest CD or money market.
Determining borrowing time
The amount of time you take your loan out for is called the loan term. The lenders we work with offer loan terms from 1 - 6 years. When you borrow for a longer period of time, you can expect your monthly obligations to be lower. However, you will be paying more interest over time.
So, the term you select for your financing is going to be dependent on your financial situation (how much money is left from your budget calculations) and what you are using your loan for. For instance, let's say you just moved into a new home and discover that the heating/air conditioning needs to be replaced immediately because it completely stopped working. But since you just moved into your home, there is no equity for you to use via a home equity loan. And you are 'all in' in your home purchase. Meaning, you are house poor and don't have much money left from your monthly budget for paying for this unexpected cost. Therefore, it is going to be your best option to take advantage of a loan with the longest possible borrowing term since a longer term equates to a lower monthly premium.
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