Are you considering a loan? 5 questions to ask yourself first
With many finely balanced household budgets, borrowing money for a major purchase – like a car or home improvement – can seem like a good option.
But it’s important to make sure you understand all the implications of borrowing before you go ahead and think carefully – and consider all of the alternative options available.
Paul Went, Managing Director of Consumers at Shawbrook Bank, suggests five key questions you might ask yourself before borrowing money or taking out a loan …
1. Why do you need the money?
Before you borrow money, be sure to ask yourself exactly what you need. 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 APR representative as a guarantee of how much you will end up paying.
Sometimes people cannot find out what their personalized APR is until after they apply for the loan and a “hard” credit search has been done. Difficult research will leave a mark on your credit report that will be visible to other lenders. This can impact credit scores and can hurt them if several difficult searches are undertaken in a short period of time.
However, it is also possible for lenders to perform “soft” searches, which leave no impact on credit reports. Shawbrook uses flexible credit searches and if he thinks he can lend to someone, he will provide them with a quote 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 have to repay it in monthly installments. Providers will only lend you if they think you can afford the loan, but it is also important that you take into consideration not only your current financial situation, but also the long-term outlook until repayments are made. completed.
Having a monthly budget so you don’t get out of hand can help. And if you can, try to save money outside of your repayments as a buffer, which might help you make repayments if your circumstances change.
4. How should you 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.
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 as well, such as money advice.
5. What is your credit rating?
A credit score reflects how you have handled your credit in the past and is taken into consideration when a lender assesses your application.
You might consider improving your score before applying. There are quick and easy ways that can help you improve your credit score, such as getting on the voters list, checking your credit report for errors, or removing any financial associations with former partners.
A few other things to consider …
In addition to Went’s advice, it may also be worth considering overpayment options on any loan, which could lower the overall cost of borrowing. 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 by a particular bank or building society can also vary depending on how much you want to borrow. And in addition to Main Street banks, you may also want to consider other borrowing options, such as credit unions.
Borrowing money is never something that should be taken lightly, and if you do need credit, think carefully and be sure to shop around for the deal that best suits your needs.