Taking out a loan can be an overwhelmingly positive decision to make, but it isn’t one that should be taken lightly. Loans success stories are only seen among people who have thoroughly considered their options and forecasted the financial aspects of taking out a loan.
It is vital that, if you are thinking about applying for a loans product, you look ask yourself the following questions.
What Kind of Loan Suits You Best?
There are so many different types of loans products on the market, all of which are tailored for different people and different situations. Before deciding on a loans product, make sure you know what you are being offered, what the terms are, and consider if that product is best for you.
Most loans can be split into two categories: secured and unsecured loans. Secured loans tend to be those which offer larger sums of money, and they use an asset of yours or somebody else’s as security.
For instance, you may get a loan which is secured against the equity in your home, meaning that should you default on your repayments, your home will be repossessed. Unsecured loans tend to be of a smaller amount and only issued to people with good credit ratings because of the inherent risk of lending without collateral.
Types of loans include:
- Homeowner loans
- Car loans
- Peer-to-peer lending
- Guarantor loans
- Credit card loans
- Cash loans
- Payday loans
- Debt consolidation loans
- Home improvement loans
- Wedding loans
- Emergency loans
- Business loans
- Investment loans
- Personal loans
- Small business loans
- Cash advances
Can you Expect to Afford Repayments?
Probably the most important thing you need to consider before applying for a loan is whether or not you can actually afford the product. Loans are not issued for free, and you will always end up paying back more money than you were lent. Loans are only good for people who may need some upfront money but can expect to be able to afford their repayments down the line. Getting a loan is not worth the risk if you cannot be certain that you will have the funds to make your repayments – the last thing you need when borrowing is to get into serious debt as a result of taking out a loan.
Is Your Credit Score Sufficient?
In most cases, your approval for a loan and the rate that you are offered will very much depend on how sufficient your credit score is. As discussed, this is especially applicable to those who want to receive an unsecured loan.
No matter the loan product, however, you will usually be approved more quickly and offered a better rate if you have a good credit history. Any indications that you are a risk to the lender in terms of making your repayments will affect your eligibility for their product.
Underwriters will be able to decipher whether or not you are a risk by looking more than just your credit rating, however. Your credit rating is not the be-all and end-all of eligibility factors.
Are you Getting a Good Rate?
Many people who need financial help are so pleased to have a loans product approved that they go ahead with the first deal they can get. It is always best practice to do your research such that you know what is on the market, and whether or not you are getting a good deal on your loans product.
Rates will differ, as will terms and conditions – make sure to compare companies and get an overall picture of what you could be getting as opposed to what you are being offered.
You are more likely to be offered a better rate if your credit rating is good.
What About Variable Rates?
Most secured loans products will have a fixed interest rate applied to them, yet many unsecured loans products have variable rates such that the amount you pay each month may change. This can make it slightly harder to forecast your financials when repaying a loan, and you may end up with a worse deal than you initially expected.
What About Loan Repayment Terms?
The length of your repayment term is fundamental to your understanding of how much your loan will cost you. Generally speaking, the longer your repayment term is, the more the loan will cost you in interest charges (which are applied in each monthly payment).
The larger the loan you take out, the longer your repayment term will usually be. Given that the larger loans are secured loans, you may end up paying more when you get out a secured loan overall. However, because secured loans are safer for the lender, more competitive interest rates may be offered to you than with unsecured loans, where the risk is higher. For this reason, interest rates between loans with long and short repayment terms may actually even-out somewhat.
It is also important to remember that secured loans may have fixed rates, whereas when repaying an unsecured loan, you may either benefit or lose-out when interest rates rise and fall.
Your lender should always give you the option to repay your loan early and sometimes this will come with an early exit fee. However, overall the cost of the loan should be less since the loan is open for less time and accruing less interest.
Do I Really Need a Loan?
With all of the above considered, it is important to finally ask yourself whether or not you really do need a loan. If you have an emergency payment to make which is time-sensitive, and can expect to earn the repayment money soon, then a loan may be a good option for you.
If, however, you do not intend to use your loan on an essential cost, then you should seriously consider whether getting a loan is worth your time and money. Situations where loans are appropriate and worthwhile may involve emergency funds, business financing, investments but not for holidays, toys, gifts and shopping sprees.
In any case, however, the biggest consideration to make is your affordability; never sign a loans agreement if you are not sure you will be able to make your repayments. For advice, visit Money Advice Service.
