How to Figure Out How Big Your Personal Loan Should Be

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

You do, however, have to determine how much to borrow when you are using a personal loan. Unlike a credit card, which gives you access to a line of credit you can draw from as needed, you apply for a personal loan for a set amount and receive your money in one lump sum that you can use right away and that you’ll begin paying back right away.

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

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1. What are my goals for the money?

The first thing you need to think about is what you’re going to do with the money you’re borrowing. After all, you want to borrow the minimum you need to accomplish your goals.

Depending what you’re doing, this could mean shopping around or getting price quotes for your proposed purchase or project before you borrow. For example, if you’re borrowing to remodel your kitchen, you’d want to get a quote from a contractor to see how much your project would be, as this could determine the amount you need.

Remember, you don’t want to borrow more than necessary because that would make repayment costlier. But at the same time, you can’t just go back and borrow more if you underestimated your needs. So, say you were doing a big remodeling project and your contractor estimated it would cost $15,000. Since remodeling projects often cost more in the end, you might want to borrow an extra 10%, making your total loan $16,500. If you confirm there are no prepayment penalties on your loan, you could then pay back the extra $1,500 immediately if a miracle occurs and it turns out you didn’t go over budget on your project.

2. How much will I be allowed to borrow?

You also need to consider how much you’ll be allowed to borrow. This will be based on your income, credit score, lender policies, and other financial considerations. Some personal loan lenders offer loans for as much as $100,000, but there’s no guarantee you’ll be allowed to take out such a large loan — especially if you don’t have a very high income.

You can generally get lender quotes and get prequalified to borrow without a hard credit check by inputting your financial information with lenders online. It’s a good idea to do this with a couple different lenders to see what loan limits you’re offered, so you can make sure you’ll actually be offered the funding you’ll need.

3. How much can I comfortably afford?

Finally, you have to make sure you can afford the monthly payments on your loan, because otherwise you shouldn’t even consider borrowing. When you get prequalified, your lender will tell you how much your monthly payments would be with different loan options. Work those payments into your budget and see if you have the cash you’ll need.

You may even want to do a practice run and test out living without that money for a month or two to make sure your loan is really not going to cause financial strain (you can put the “payment” into savings instead of making it to a lender in this scenario).

By taking these steps, you can make sure you get the right personal loan to meet your needs — and you won’t end up regretting your borrowing choice.

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