Personal loans can be a very dangerous path, leading you into a cycle of debt that can be difficult to get out of. But they can also be very helpful, if used appropriately. We list the right questions to ask before you consider taking out a personal loan.

Am I taking a loan for something I should be saving for?

It’s the classic wants vs needs argument that any financial advisor will warn you of. You may feel like you need a vacation in the Bahamas but if you can't afford it then perhaps a holiday in Balito will have just the same effect. There are certain instances where a personal loan can be unavoidable, but only take out such a loan if you cannot put off the purchase you need to make, and you cannot scale it down to a cheaper option.

Am I taking out a loan to feed my cycle of debt?

Taking out a loan to pay off debt is a slippery slope best avoided. A better option is to go to your financial service provider and negotiate new repayment terms that you can keep up with.

Can I afford the loan repayments with a 10% cut in my salary?

Before taking out a loan, take a very sober look at your monthly budget. Ideally you should be able to make the loan repayments even if your salary is about 10% lower, this way you can be sure that you can make your repayments even if unexpected costs crop up in the future. If you can only afford the repayments by the skin of your teeth, then you cannot afford the loan.

What is my credit score?

Get your credit report before applying for a loan. Loan applications can reflect badly on your credit score so your current credit situation needs to be borne in mind before you apply for a loan.

Would a credit card be a better option?

If you are about to make a once off purchase that you believe you can pay back fairly quickly, it might work out cheaper to get a credit card instead. Credit card interest is high however, so weigh up the two options before making a decision.

What to ask you financial services provider

  • What are the interest rates? Shop around for interest rates, as not all banks and providers will offer the same rates. 
  • How flexible is the repayment period? Find out how much time they are willing to give you to pay the loan off. Also find out about flexibility. Some banks will penalise you if you try to pay the loan off faster, ask about this and see if you can avoid such penalty fees.
  • What happens if I default? Before you take out the loan, ask some difficult questions about worst case scenarios. Anything could happen and it’s best to know upfront what your financial services provider’s policy is for loan defaults or how flexible they are if you need to negotiate new repayment terms.

When taking out a personal loan you are committing yourself to making certain payments, including interest, for a certain period of time. You need to be sure that this is the best option for you, and that you can afford to pay it back.