How to figure out the size of your personal loan

Taking out a personal loan can be a great way to borrow money for an important purchase because you have flexibility in how you use the funds. And with an average interest rate of 12.35% (compared to the average credit card interest rate of 21.47%), personal loans can also be an affordable lending solution.

However, when using a personal loan, you need to decide on the loan amount. Unlike credit cards, which provide a line of credit that can be drawn as needed, a personal loan allows you to apply for a set amount and receive money in a lump sum that you can use immediately. Start paying it back right away.

Deciding exactly how much to borrow can be complicated, but asking yourself these questions can help you make the right choice.

1. What are my goals for money?

The first thing to think about is what you will do with the money you borrow. Ultimately, you want to borrow the minimum amount of money necessary to achieve your goals.

Depending on what you are doing, this may mean shopping around or getting a price quote for a proposed purchase or project. before You borrow. For example, if you’re taking out a loan to remodel your kitchen, you’ll want to get a quote from a contractor to see how much the project will cost. This can determine how much you need.

Remember. You don’t want to borrow more than you need. This is because repayment costs will be higher. But at the same time, if you underestimate your needs, you can’t go back and borrow more. For example, let’s say you’re working on a large remodeling project and your contractor estimates it will cost $15,000. Since remodeling projects often end up costing more, you can borrow an additional 10%, bringing your total loan amount to $16,500. After you confirm there is no prepayment penalty on your loan, you can immediately pay back the extra $1,500 if a miracle happens and it turns out you didn’t go over your project budget.

2. How much can I borrow?

You should also consider how much you are allowed to borrow. This will be determined based on your income, credit score, lender policies, and other financial considerations. Some private lenders offer loans of up to $100,000, but there’s no guarantee you’ll be able to get a loan that large. This is especially true if your income is not very high.

Typically, by entering your financial information with a lender online, you can get a lender quote and pre-qualify for a loan without a rigorous credit check. It is a good idea to do this with several lenders to see what loan limits they are offering. This will help you ensure that you are actually getting the funding you need.

3. How much can you comfortably afford?

Finally, you need to make sure you can afford the monthly payments on the loan. Because otherwise you shouldn’t be considering the loan. Once you are pre-qualified, your lender will let you know what your monthly payments will be based on different loan options. Work those payments into your budget and make sure you have the cash you need.

You could practice and live without that money for a month or two. really It won’t cause you a financial burden (in this scenario, you can put the “payment” into your savings instead of paying the lender).

By taking these steps, you can ensure you get the right personal loan for your needs and you won’t regret your loan choice.

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