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How Big of a Personal Loan Should I Apply for?

When you need a lump sum of cash and your savings fall short, personal loans can sometimes step in and be a valuable lifeline. Whether you’re looking for help with unexpected medical expenses, funding a home renovation, or trying to make a major purchase, personal loans can be a potential solution.

Having said that, one of the most important parts of the borrowing process is trying to figure out how big of a personal loan you need as borrowing too much can lead to possible financial strain.

Today, we’re going to explore some of the important things to consider when determining the size of personal loan you need, and try to give you some guidance to help you make an informed decision.

1. Assess Your Financial Needs

The first step in trying to figure out how much money you’ll need is to assess your financial needs thoroughly. This involves taking a close look at your specific reasons for borrowing and estimating the associated costs. Here are some common situations where people opt for personal loans and some tips to assess your financial needs if you find yourself in any of these scenarios.

a. Medical Expenses

For unexpected medical expenses, tally up the costs of procedures, medications, and any other related expenses. Make sure to include future expenses if you anticipate ongoing medical treatment.

b. Home Renovations

If you’re looking to renovate your home, create a detailed budget that accounts for all anticipated costs. This should include things like construction, materials, permits, and any unexpected expenses that could come up during the renovation process.

c. Car Repairs

When your car is essential to your ability to navigate through your day-to-day, you may not be able to go without it for long. If that’s the case, you’ll want to deal with any unexpected car repairs as fast as you can. Before going out and paying the nearest mechanic without a second thought, try to get quotes from different people and try to get as good of a deal as you can. You may want to consider the cost of a car rental if you see yourself needing to rent one.

2. Calculate the Cost of a Potential Loan

Once you've determined your financial needs, it's important to calculate the cost of borrowing. This involves considering the principal loan amount, the loan term, and the annual interest rate. These are some of the most important factors to consider to figure out the total cost of your loan.

a. Principal Loan Amount

This is the loan amount that you borrow.  

b. Loan Term

The loan term refers to the length of time over which you'll repay the loan. Shorter loan terms may come with higher minimum payments but lower overall interest costs, while longer terms may have lower minimum payments but higher overall interest costs. It is important to remember that this may not always be the case and repayment can work differently depending on what type of loan you’ve applied for, for example, if it’s an open- vs. closed-end loan.

While you might not be able to choose the loan term of a personal loan you apply for, you can look for loans that align with your budget and financial goals.

c. Interest Rate

The interest rate determines how much you'll pay in interest over the life of the loan. It's important to shop around for a loan with an interest rate that you can afford to minimize your borrowing costs.

d. Additional Fees

Be aware of any additional fees that come with any personal loan you apply for, like origination fees or prepayment penalties. These can add to the overall cost of borrowing.

With these factors in mind, you can use a loan calculator or spreadsheet to help you get a clearer idea of the cost of a loan. This will help you understand the financial commitment you're making and whether it aligns with your budget. If you have any questions on repayment or you want to get an even better understanding of the cost, it may be ideal to contact the lender or servicer you’re considering borrowing from or through.

3. Consider Your Budget and Financial Standing

Your budget plays a pivotal role in helping you figure out how big of a personal loan you can realistically afford. Before committing to a loan amount, consider some of these factors.

a. Monthly Income

Take a look at your monthly income from all sources, including your salary, rental income, investments, and any other sources of revenue. Make sure that your income is stable and sufficient to cover your regular living expenses and the loan payments.

b. Monthly Expenses

List all your monthly expenses, including rent or mortgage payments, utilities, groceries, insurance, transportation, and discretionary spending. Deduct these expenses from your monthly income to determine how much you can comfortably allocate to loan payments.

Person entering credit card info into phone.

c. Debt-to-Income Ratio

Lenders may consider your debt-to-income (DTI) ratio when assessing your eligibility for a loan. This ratio is calculated by dividing your monthly debt payments by your monthly income. A lower DTI ratio is generally better to see, as it helps to show that you have more disposable income to cover loan payments.

By carefully analyzing your budget, you can figure out the maximum monthly loan payment you can afford without compromising your financial stability. Keep in mind that taking on a large loan with high monthly payments can strain your finances and lead to difficulties in meeting your other financial obligations.

4. Consider Your Credit Score

Your credit score can be an important factor in determining the interest rate and loan terms you qualify for. Some lenders may use your credit score to assess your creditworthiness and risk as a borrower. A higher credit score may help one to qualify for lower interest rates, while a lower credit score may lead to higher interest rates or difficulty qualifying for a loan.

Before applying for a personal loan, check your credit score and credit report. You can get a hold of a free copy of your credit report from each of the major credit bureaus (Equifax, Experian, and TransUnion) once a year through Review your report for any errors or discrepancies and report them quickly. You can pay a major credit bureau for a copy of your credit score, or you can look online for sites that can show you your score for free.

5. Evaluate Your Financial Goals

When determining how big of a personal loan you need, it's important to consider your broader financial goals. Taking on debt should align with your financial objectives rather than hinder them. Here are some things you should consider.

a. Short-Term vs. Long-Term Goals

Are you borrowing for short-term needs, like covering a one-time expense, or for long-term goals, like buying a home or investing in education? Your loan amount should reflect the specific goal you're pursuing.

b. Impact on Savings

Will taking out a personal loan deplete your savings or emergency fund? Assess how the loan will affect your financial cushion and whether you're comfortable with the potential trade-offs.

c. Monthly Payment Affordability

Can you comfortably afford the loan payments every month without sacrificing your ability to save, invest, or meet other financial obligations? Consider how the loan fits into your overall budget.

d. Interest Costs

After you’ve calculated the interest costs over the life of the loan, evaluate whether the benefits of borrowing outweigh the costs. Sometimes it's better to explore alternative funding sources to reduce overall interest expenses.

e. Financial Stability

Assess your job security, income stability, and overall financial situation. Ensure that you can meet your loan obligations even in unforeseen circumstances.

Remember that personal loans are a financial tool, and their use should align with your broader financial strategy. If your goals involve saving for retirement, building an emergency fund, or investing, it's crucial to strike a balance between borrowing and saving to ensure your financial well-being.

6. Consult a Financial Advisor

If you're unsure about how big of a personal loan you need or how it fits into your financial plan, consider consulting a financial advisor. A qualified advisor can provide personalized guidance based on your unique financial situation, goals, and risk tolerance. They can help you make informed decisions about borrowing and assist in creating a financial plan that aligns with your objectives.

A group of people looking at personal loans on a computer.

Consider These Factors Carefully Before Applying for a Personal Loan

Determining the size of a personal loan you need is a significant financial decision that requires careful consideration of your specific needs, budget, and goals. By assessing your financial needs accurately, calculating the cost of borrowing, and evaluating your financial situation and goals, you can make an informed decision about the loan amount that's right for you.

On top of this, exploring different loan options may help you find a loan that suits your needs. Remember that borrowing responsibly and aligning your borrowing with your broader financial plan is key to achieving your financial goals while maintaining financial stability.

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