Taking out a loan is a fairly quick, easy and straightforward process but it's not something you should take lightly. Knowing exactly why you're taking out a loan, if there are any alternatives to borrowing, how much it's going to cost you and if you can afford the loan are critical questions that you need to answer before submitting that loan application.
The most important questions you need to ask before getting a loan
- Do you need the loan?
- Are there any alternatives to taking out a loan?
- How much will the loan cost you?
- Can you afford the loan?
- What is the loan for? Is it buying a car, consolidating debt or perhaps for a last minute holiday?
Answering these questions will not only save you from taking on debt that you cannot afford but it will help you develop healthy financial habits and goals.
Find a loan that suits your needs
What do you need the loan for?
Is it an emergency? For example, do you need to get yourself a quick cash loan to pay off a doctor's bill? Payday loans are often used for cash emergencies as they are easy to qualify for and even easier to apply for.
Vehicle repairs, unexpected expenses and cash shortages are only some of the reasons why people apply for short-term or payday loans.
These short-term loan types often have higher interest rates but when you need cash in an emergency, they are definitely the quickest solutions.
Do not take out a short-term loan to pay existing debts or try to consolidate debt. The short loan terms and higher interest may mean that you will end up paying a lot more for your debts and you may struggle to meet the required repayments.
Are there any alternatives to taking out a loan?
There are a wide range of alternatives to taking out a loan which you will have to pay interest and fees on. This could be saving the money you need for whatever you want to use the loan for, borrowing from a family member, selling unused household items to get the cash you need or even coming to the conclusion that you can do without the purchase or holiday until a later date!
How much will the loan cost you?
All lenders will have their own interest and fess on their loans. In addition, the rate that you secure on a loan will be based on your own credit score.
If you have a poor credit score you will end up with a higher interest but if you have a good credit score you may just get the best interest rate the lender has to offer.
This is usually referred to as the promotional interest rate and is the best a consumer can hope to get.
To find out exactly how much a loan is going to cost you, always use a loan calculator which can be found on most lenders' sites.
Loan costs that you need to pay attention to include:
- The interest rate
- The loan APR (Annual Percentage Rate)
- Monthly fees
- Annual fees
- Renewal and rollover fees
- Early repayment fees
- Dishonor or non-payment fees
How much should I borrow?
When you apply for a loan online or at the bank, you may find that you are actually pre-approved for more than you thought. We all think that this is great news and we find ourselves wanting to loan more than we need.
By falling for this offer of more cash, you might find yourself straining your budget and creating a financially uncomfortable situation. The best decision you could possibly make is to loan only what you need and nothing more. Incurring debt that you have no need for will only cause you to suffer negative consequences later on.
Is a larger loan amount always a good idea?
You also need to keep in mind that you will have to pay for the extra cash and if you are to take a personal loan you are looking at an interest rate of up to 25 % percent.
If you are to take out the higher amount you could land up paying double the amount back to the bank or for more than double in some cases. The extra cash now is not always worth the cost of it.
Can you afford the loan?
Lenders will always run a credit check and do an affordability check before approving a loan but, since you're the one that's going to have to make the monthly loan repayments you should ensure you can afford the loan yourself.
You can do this by adding the loan repayments to your monthly expenses in your budget or checking your monthly income and expenses without and then with the new loan repayments.
If you have any doubt as to whether you'll be able to afford the repayments, then you should avoid taking out a loan as you may find yourself in serious financial trouble.
Get the right loan for your particular needs
You can apply for financing and if approved, use this to your full advantage. The trick is to ensure that you choose the correct loan type, that you understand the terms and conditions of your loan and that you stick to your monthly repayments.
If you choose a loan amount within your budget, you will maintain that comfort level with the extra monthly repayment you now have. Financing is important to ensure you get ahead and, if done responsibly, you will reap the rewards.
Choose the right loan the first time around
Before applying for a loan, be sure to compare lenders and loan types. Your individual circumstances and goals need a specific credit facility or loan. By using an online loan comparison site, you can use the abundance of information to make sound financial choices and ensure that you choose the right loan for your needs the first time around.