8 things you should know before applying for a loan
Applying for a loan should never be taken lightly. Before you start submitting any applications, make sure you know the answers to these eight questions.
Applying for and securing a loan is no trivial matter, so clueing yourself up beforehand is certainly wise. To help you prepare, we’ll take a look at eight questions you might want to answer before deciding whether a loan is the right route for you.
1) Is a loan the right option?
First and foremost, are you sure that this is the most suitable option for you for raising those extra funds you need? Depending on what you need the money for, there could be an alternative, more cost-effective way of borrowing.
If you need the money for something in particular – like a new sofa, for example - a credit card could be a better option for you. Some stores now offer new customers deals where they pay 0% interest for a set period of time, so if you’re able to pay off the balance within this timeframe, it’ll cost you less than any loan out there.
With a credit card, you won’t be charged extra if you pay off your balance early. So, if you are able to pay back your credit in the not-so-distant future, a credit card would avoid any of the early repayment fees you could face with a loan - even if it doesn’t come with 0% interest.
2) Are the repayments affordable?
If you’ve decided a loan is the right option for you, making sure you can afford your monthly repayment amount is crucial.
We know you’re (probably) not mystic meg, but considering your circumstances both now and in the future could give you the peace of mind that you’ll be able to keep up with your repayments for the life of your loan.
You could consider increasing the term of the loan to reduce your monthly repayments - but remember, increasing the term will increase the amount of interest you pay overall and it will likely take you longer to repay the debt.
3) Is the term realistic?
When considering how long to take the loan out for, consider how your situation could change over the life of your loan. If, for example, you’re planning on starting a family in the near future, consider if you’ll still be able to continue making your payments with all your new financial priorities.
4) Are there charges for early repayment?
As previously mentioned, many loan providers will charge you an early repayment fee if you want to pay off the remainder of an outstanding loan early. This is because lenders make their money by charging interest on the money they lend to you - so if you pay it back early, they could charge you to make up for the interest lost.
You might decide it’s worth paying the fee in order to be debt free, or you might decide to keep hold of your lump sum and use it to pay off the loan monthly, but either way, it’s good to know where you stand on this before taking out any loan.
5) What’s the interest rate?
We’re sure you’re aware that loans can come with a fixed interest charge, which you’ll pay back as part of your monthly repayment amount over the life of your loan.
APR stands for Annual Percentage Rate, and it’s how much your borrowing will cost you over the length of the loan term. This will make it easier for you to compare loan offers, so you can find the best deal for you.
Before agreeing to any loan, spending a bit of time shopping around and researching loans that are right for you could ultimately save you money, leaving you to make the most out of your loan. Price comparison sites are easy to use and a simple way of comparing loan deals.
6) Are you borrowing the right amount?
When looking at loan deals and offers, it can be tempting to borrow more than you actually need. That’s why it’s a good idea to work out exactly how much you need before shopping, so you won’t be tempted by taking out more than you need.
Borrowing more than you really need may increase your monthly repayment amounts, as well as the amount of interest you pay, which could mean it takes longer to repay the debt.
7) Are there any additional fees?
Again, a little time spent could save you encountering bumps in the road over the course of your loan. Before you agree to anything, read the terms and conditions carefully to make sure you know what you’re signing up to.
We’ve touched on early repayment fees already, but some lenders (not all) may charge administrative fees, extra fees for operational overheads, or additional fees to protect against missed payments.
8) What about credit records?
The final point worth considering before taking out a loan is the impact your credit history will have on your application and deal.
Having a poor credit score doesn’t necessarily mean you won’t be accepted for a loan, it’s just likely to affect your terms. For example, you may find you’re offered a smaller loan with higher interest charges. This is because the best interest rates are often available to people with the best credit histories.
So, before taking out a loan, consider whether you’re willing to pay a higher price due to your credit score.
Always remember to only borrow what you can afford, as taking out a loan you struggle to repay may make it more difficult for you to secure credit in the future.
Disclaimer: All information and links are correct at the time of publishing.