Apply for a loan or credit card before summer? First ask yourself these five questions
As summer approaches and restrictions ease further to help the country return to its pre-pandemic state of “business as usual”, many people may consider borrowing money to help themselves. tackle home renovations, buy a new car, book a family vacation, or treat yourself to a wardrobe upgrade.
Whether you’re thinking about a loan or applying for a new credit card, or even just asking for a limit increase, it’s worth being fully prepared before you take the next step.
It is important to make sure that you fully understand all the implications of borrowing before going ahead with any application and it is crucial that you think things through carefully, considering all of the alternative options.
Paul Went, Managing Director of Consumers at Shawbrook Bank, suggests five key questions you should ask yourself before borrowing money – from any type of lender.
1. Why do you need the money?
Before borrowing money, be sure to consider exactly why you need the money – this will help you manage it responsibly.
The purpose of the loan may be taken into consideration, so make sure you can show that you have given it some thought before you apply.
2. How much will it cost?
The APR, or annual percentage rate, is the cost of borrowing, which helps borrowers compare offers before taking out a loan.
Keep in mind that some lenders display their “representative APR” in their advertising. This is offered to at least 51% of their successful applicants. The remaining 49% could end up getting a different rate. So while this is a useful comparison tool, you shouldn’t rely on the representative APR as a guarantee of how much you’ll end up paying.
Sometimes people can only find out what their personalized APR is after they apply for a loan and have done a “hard” credit search.
Thorough research will leave an imprint on your credit report that will be visible to other lenders. This can impact credit scores and can hurt them if several in-depth searches are done in a short period of time.
However, it is also possible for lenders to perform “soft” research, which leaves no impact on credit records. Shawbrook uses flexible credit searches and if he thinks he can lend to someone, he’ll quote them for a guaranteed personalized rate up front. Other lenders may also offer personal quotes without leaving a credit imprint, so it’s worth checking out.
3. Can you afford it?
If you take out a personal loan you will usually be required to repay in monthly installments, with credit card repayments ranging from a minimum monthly amount to a premium payment or even a simple clearance of your balance.
Suppliers will only lend you if they think you can afford the loan, but it is also important that you consider not only your current financial situation, but also the long-term outlook until the repayments are complete.
Having a monthly budget, so you don’t go wrong, can help. And if you can, try to have savings outside of your repayments as a buffer, which might help you make repayments if your situation changes.
4. How to borrow money and how much do you need?
Always choose the option that best suits your situation. Personal loans, for example, are generally more suitable for borrowing larger amounts that you pay off over a longer period.
Credit cards are longer term, but the amount of credit you have depends on the lender and depends on your creditworthiness and the likelihood that you will be able to meet your monthly payments.
If you are unsure of the best option, you can try talking to your bank or a financial advisor. They can guide you on the different products and the associated costs.
There are also many free online guides, tools, and services that can help you understand your options, such as providing financial advice.
5. What is your credit rating?
A credit score reflects how you have handled credit in the past and is taken into consideration when a lender assesses your application.
You might consider trying to improve your score before applying. There are quick and easy ways that can help you increase your credit score, such as getting on the voters list, checking your credit report for errors, or cutting off any financial association with former partners.
Some other things to consider
It may also be worth considering overpayment options on any loan, which could lower the overall cost of the loan.
You may also want to consider options such as credit cards with an initial zero interest period, keeping in mind what the fees will be after the initial period ends.
The APR offered on a loan from a particular bank or building society may also vary depending on the amount you wish to borrow. And besides the big banks, you can also consider other borrowing options, such as credit unions.
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Borrowing money is never something to be taken lightly, and if you do need credit, think carefully and be sure to research the deal that best suits your needs.
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