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5 Questions to Ask for a Personal Loan Help During a Crisis
When a financial crisis comes along — whether it’s a job loss, illness or something else — your first thought may be how to pay for it.
Having an emergency fund can help cover the gap. But in an extended financial hardship, your savings may only stretch so far. And if you live paycheck to paycheck, you may not have had room in your budget to start your rainy day fund yet.
Taking out a personal loan could give you the money you need to pay bills or cover other expenses related to a crisis. But is a personal loan the right solution? Consider these questions first.
Is it hard to get a personal loan now?
When a financial crisis affects a large group of people, not just you personally, that can affect the way banks approach lending. During the COVID-19 pandemic, for instance, many lenders have tightened restrictions on borrowing to minimize their investment risk.
Whether it may be difficult for you personally to get a personal loan depends on how creditworthy you appear in the eyes of lenders. When applying for personal loans lenders will look closely at your:
- Credit scores
- Income and employment status
- Debt-to-income ratio
A higher credit score and a stable source of income can work in your favor when trying to get approved for personal loans in a crisis. They can also translate to lower interest rates, saving you money on the total cost of borrowing.
If you have a poorer credit score or a thin credit file, on the other hand, getting a personal loan in a crisis could be more challenging. Which brings us to the next question to ask when considering a personal loan during hard times.
What type of personal loan is best?
Personal loans aren’t all alike and if you need to borrow money in a financial crisis, it pays to research all the options.
For example, some personal loans are unsecured, meaning you don’t need collateral to qualify for them. An unsecured personal loan might be a good option if you have a solid credit score and your income is stable.
Secured personal loans, on the other hand, require collateral. If you can’t get approved for an unsecured personal loan based on your credit history, then a secured loan could be the next best thing. But keep in mind that if you fail to repay the loan, the lender gets to keep your collateral.
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Then there are alternative personal loans. They include:
- Payday loans
- Installment loans
- No credit check loans
While these types of loans can be easy to get approved for, even with bad credit, they can carry significantly higher interest rates and fees. Payday loans can also make it easier to get trapped in a cycle of expensive debt.
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Is it a good idea to get a personal loan?
Personal loans can offer some advantages in a financial crisis when you need money.
You can use a personal loan to pay your everyday bills, including rent or mortgage payments, utilities and buying groceries. A personal loan can also help with managing a large, one-time expense you weren’t expecting.
Compared to something like borrowing from a credit card or from friends and family, a personal loan could also allow you to access larger amounts of money. That, of course, depends on your creditworthiness. And when interest rates for personal loans are low, they could be a cheaper way to borrow than a credit card.
What’s important to keep in mind is why you need the loan and your ability to pay it back. If you’re caught in a financial crisis that will eventually pass and you’re confident that you can repay the loan on time, then a personal loan could work for you. But if you can’t repay the loan, you risk damaging your credit score and becoming the target of debt collection actions.
How long can you finance personal loans?
Understanding personal loan repayment terms can help with deciding whether a personal loan makes sense for your budget. Some personal loans are designed to be short-term, with repayment terms of 12 months or less. Long-term personal loans may allow up to five years to pay back what you borrow.
A longer loan term means more time to pay and a smaller monthly payment. But you’ll pay more interest in total overall, versus repaying the loan in a shorter window.
How do I find the right personal loan for me?
If you think a personal loan is your best option for covering expenses in a financial crisis, it’s important to find the best loan for you.
You can do that by comparing loans from different lenders. Specifically, that means looking at:
- Minimum credit score and income requirements to qualify
- Loan repayment terms
- Loan interest rates, APR and fees
- Funding speed once you’re approved
- Minimum and maximum borrowing amounts
Getting rate quotes from multiple lenders can help you narrow down the options. Just remember that if a rate quote requires a hard check of your credit, that could knock a few points off your credit score. Comparing personal loan rates without a hard credit pull can help you find the best loan for you without dinging your score.
Rebecca Lake is a freelance writer specializing in personal finance, credit and debt. She’s a contributor to U.S. News and World Report, Forbes Advisor and The Balance and her work has appeared online at CreditCards.com, MyBankTracker, Money-Rates.com and dozens of other top publications.