Ideally, you'd never need a loan. But life happens and sometimes you need extra cash to cover an unforeseen expense. Cars break down, pets get sick, and appliances sometimes need to be replaced. But this is where we have to be careful. It's all too easy to convince yourself that you need a personal loan for a certain purchase when it would be wiser to put off borrowing money until you really need to. And that begs the question, when is a loan justified? Here, we look at five points that should be checked off before you apply for a personal loan.

1. Is your purchase essential?  

Essential expenses are those that need to be met for you to carry on living your normal day-to-day life. It's possible that you might need a loan to cover vehicle repairs or dental treatment not covered by your medical aid. But a new TV isn't essential, and when you take on loans for such expenses, you reduce your chances of qualifying for a personal loan when you really need it. Before taking out a loan, always ask yourself ‘Do I really need this?’

2. Do you intend to use the money to advance yourself? 

The greatest investment you can make is in yourself, and any money spent on training and upskilling is money well spent. When you know that a certain qualification or skill set will make you more employable, it can make sense to grow yourself with a personal loan. But education and training aren't the only tools that you might use to develop yourself. If a musical instrument helps you land a gig, such a purchase can also warrant a loan.

3. Do you have a good credit score?

If you have a below-average credit score, you probably shouldn't be applying for another loan. A good credit score, on the other hand, could make you eligible for a lower interest rate, meaning that you would pay less over the life of a loan than if your credit score were lower.
Read our blog article to learn how to establish a good credit score. You can also read about how to improve your current credit score.

4. Are you able to borrow from a responsible lender?

There's a reason that some lenders will offer you a loan while others won't. Irresponsible lenders have no qualms about saddling you with crippling debt that they know you might not even be able to pay off. Their interest rates are high enough to ensure that if the odd customer defaults, they're still able to cover the cost.

When considering applying for a personal loan, just remember that bad-debt lenders will take their pound of flesh one way or another. If you can't get a loan from a reputable lender, reconsider how badly you need the extra money. To learn more about how to identify a responsible lender, read our blog, how to choose a personal loan. You can also learn more about responsible lending through our Thought Leadership Podcast Series.

5. Can you easily afford the payments?

This should go without saying, but in times of trouble, people can become desperate enough to take out a loan that they’re unable to pay back. By taking a loan from a responsible lender, you avoid incurring unmanageable debt. You still need to adjust your budget so that you can see how much you'll be left with after your monthly payments. Use our personal loans repayment calculator to get an estimate of what your monthly loan instalments would be.

Of all the boxes you check before applying for a personal loan, these are the most important: borrow only as much as you can pay back, and only borrow from a responsible lending institution. Institutions that offer quick loans and charge excessively high interest rates are not responsible.

Unlike credit cards, personal loans have to be paid off within a certain time period. If you fail to pay off a loan in this allotted time, a lender could take you to court, and have you blacklisted. This would do serious damage to your credit score, which could negatively affect future borrowing. Read the fine print on the contract and be aware of the penalties for late payments.

Also, pay careful attention to the kind of interest rate offered. A promotional rate can start low but then jump to a higher rate after a certain time period.

If you tick one of the first two boxes, and then check three, four, and five, a personal loan might be just the solution you’re looking for. Just ensure that when you do apply for a loan, it’s with a responsible lender and that you've read the fine print.

As a financial institution that prides itself on its responsible lending, we at Old Mutual go out of our way to ensure that our customers understand the terms and conditions of their loans, thus ensuring that they avoid any unpleasant surprises. If you'd like to learn more about Old Mutual's personal loans, please visit our personal loans page.