No matter how prudent you are with money, there are times in life that almost all of us will find ourselves short and need to borrow money to get by. Actually, if you think about it, the majority of people spend at least a percentage of their lives in debt – whether that be in the form of a mortgage for a home or long-term credit for a car.
Whatever the reason for taking out a personal loan, it’s important you consider all the implications of your borrowing and find the loan product that’s right for you. Below are some tips to help guide you.
What to consider when taking out a loan
There are multiple reasons why people might take out a personal loan. The most common being debt consolidation (personal loans often give more competitive interest rates than other types of borrowing), life events (like funerals, weddings, etc), or just for more everyday expenses like unexpected car repairs or home improvements.
Decide how much you need to borrow: It might sound obvious but, before approaching a lender, you should have a clear idea of how much you need to borrow and – perhaps more importantly – how much you can afford to pay back (and how regularly). A lender is far more likely to approve your loan if you can give them clear assurances of your ability to pay them back and over what term.
Choose your lender and do research for the most competitive interest rates: It’s surprisingly common for people to just go to their existing bank for a loan choosing the familiar rather than thinking rationally and checking other loan products. In recent years, there’s been a huge explosion in online-only banks and lenders that may well offer better interest rates or terms than your bank. Before signing up for a loan, you must do some research to see what deals exist with other lenders.
Remember to check fees and associated charges: The total cost of your loan isn’t just based on the interest rates you’ll pay. It’s also not uncommon for lenders to impose set up and processing fees. You may also find some lenders penalize you for late payments and early loan cancellations. Again, you should do thorough research to find the most preferable deal.
Don’t forget – you’ll have to pay back what you borrow: This again might sound obvious but it’s surprising just how many people fail to consider the fact that the money they borrow will have to be paid back eventually. Look at your typical monthly outgoings now and imagine lumping in the extra monthly payment of whatever figure you’re going to borrow. Of course, you can reduce the amount you pay each month by lengthening the term of the loan – but this will also increase the total you pay back so be sure to think carefully about how much you need to borrow and over how long.
Look for flexibility in your repayment schedule: The majority of lenders will charge you a fee if you want to end your loan early but you should still check how much you should expect to pay. Some lenders allow early foreclosure without penalty – but the majority will typically charge anywhere between 2% and 5% of the remaining balance. Once again, your decision on which lender to choose should be based on exhaustive research of all the available options.
