The first question that you should ask yourself before taking out a loan is “do I need this loan?” Using a loan to fund a purchase is an expensive way to obtain an item. It means that you are not only paying the listed price for the item but, on top of that, you will also end up paying interest on the loan. Additionally, any problems that you end up having with regards the repayment of the loan may hurt your credit rating.
That’s not to say that a personal loan isn’t sometimes a valid option. There are some large ticker items, such as cars, that we may have a genuine and immediate need for and which it would be difficult to obtain without the help of a loan. What’s important, however, is that you have weighed up your options and only choose a loan as a last resort. For example, in some instances, you may be able to avoid the need to take out a loan by simply delaying your purchase by a few months, thus enabling you to save up the required money.
Assuming that you have carefully considered your options and have determined that a loan is necessary, there are some additional important factors to take into account. First of all, you will need to decide what size of loan you require and how much you can afford to pay back each month. Remember that it’s in your interests to only take out the minimum size of loan that you absolutely require, and that the quicker you’re able to pay it back the less interest you will have to pay on top of the capital amount. You do need, however, to be absolutely comfortable that you can afford the monthly repayment amounts.
Having done your sums it’s time to research the loan market. Don’t just go with the first loan offer that you see advertised. If you do, then there’s a good chance that you may end up paying a lot more than you need to. Instead, check out the loans that a number of lenders are offering. Price comparison websites make this process fairly hassle-free, but you can also visit various lenders’ websites or phone them or pop into one of their branches. As well as comparing the interest rates, make sure that you check to see whether there are any fees associated with the loans, and what their repayment terms are.
The next thing you need to check is whether a bank will offer you a loan. Lenders use a process called credit scoring to assess whether individuals are a good or bad risk for a loan. The healthiness of your credit score will largely depend on how good or bad you’ve been at maintaining your checking/current account and credit cards and whether you’ve missed any payments on previous loans.
Having been successful in being offered a loan, you will probably be asked whether you wish to take out loan protection insurance. The idea of such insurance is that by paying a monthly premium, you will be protected in the event that you lose your job and can’t keep up on payments. However, with many personal loans being for fairly small amounts, the relevance of loan insurance is often questioned, and may just add to the cost of your purchase.
In summary, then, the main considerations should be:
– Do I need a loan? Is there an alternative?
– Assuming that I need a loan, what is the minimum amount that I need?
– Can I afford it?
– What is the best rate that’s available?
– Will I be accepted for a loan?
– Do I need loan insurance?
Having been through all of these thought processes, you will be better placed to take out a loan. Remember that it’s important not to miss any payments and that loans should really only be viewed as the payment choice of last resort.