Determining Personal Loan Needs

Usually, you know how much you need when you apply for a personal loan because of the loan’s purpose. You determine an auto loan amount based on the cost of a car, or the mortgage by the price of a home. When your needs aren’t as well defined, it can be tricky to know what number to put on your loan application. By taking the time to evaluate the exact nature of your needs, you can ensure you apply for the loan you really need.

Expense Frequency

Knowing you want to apply for a personal loan is only a small piece of your task. Before you can apply, you must define the nature of the expense you need the loan to cover. Is this a single expense or recurring?

If you have a one-time expense, applying for a fixed-rate personal loan may be your best option. On the other hand, a personal line of credit is often the better option when you expect the expenses to occur more than once. Failure to get the right loan product the first time around might lead to multiple loan applications over a relatively short period.

Expense Timeline

Once you understand what type of personal loan is the best fit for your situation, it’s time to consider how much you need to borrow. Sometimes, the easiest way to estimate your total expenses is to plot out a timeline of when you’ll need the money. For example, making improvements to your home often happens in phases. Finding how much you can expect to spend during each phase will tell you how much you need for the total project.

Income Expectations

When you apply for any personal loan, it’s crucial you remember that your lender sets payments based on your current income level. If your loan’s purpose is to start your own business, you must keep in mind that your income may drop while you build up your new customer base. Unless you have savings to supplement your income, consider applying for personal loan amounts that yield a payment you could afford, even if your income dropped by half. This may mean borrowing less money than you originally hoped, but you’ll protect your credit score by doing so. Even when you expect your income to increase, it’s still smart to borrow only what you can afford to repay based on your current earnings.

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