It’s relatively easy to borrow money. If you’re considering a major purchase or if you’re thinking about borrowing money to pay off an existing debt, there will be banks and other loan providers willing to consider your application if you meet their requirements.
But before you take out a loan, there are a few considerations that need to be made. As such, you shouldn’t fill out that loan application too hastily as you should take a step back and consider the following.
#1: Is a loan the best option?
When you take out a loan, you have to pay back both the capital and the interest. If you can afford the repayments, then fine.
But if you’re taking out a loan to write off debt, you are probably in financial difficulty already, so is taking out another loan really the best option? If your monthly repayments will be smaller, then a debt consolidation loan could be right for you. But then again, an IVA could be the better option. Seek advice from a debt management company so you know the best way forward.
If you’re taking out a loan to pay for a major purchase, such as a new TV or a car, you should search for the lowest-interest options. But the better option might be saving your money until you can afford what you want without taking out a loan. This way, you won’t add another debt to the debts you might already have accumulated.
#2: Can you afford the loan repayments?
Before you fill out the loan application, you should consider your monthly income and list all of your expenses. After working out your outgoings, you will know how much you have left over at the end of each month. If you don’t have a lot of spare money, then taking out a loan could be a bad idea as you might struggle to make the monthly repayments.
But even if you can afford the loan now, there may be a chance that you will struggle to repay it in the future. If your job situation is likely to change or if you are planning on growing your family, you may be financially stretched at some point down the line. If you still decide to take out a loan, don’t borrow more than you need and make every effort to repay it early so you don’t have to pay more interest than necessary.
#3: What is your credit score like?
When deciding how much to lend to you and what interest to charge, most lenders will run a credit check on you. If you have a good credit score, you stand a better chance of obtaining a loan with a lower interest rate. But if your credit score is poor, you might be turned down for a loan or you may be offered a loan with a high rate of interest.
Sign up to a credit reference agency, such as Experian or Equifax, and check your score. If it’s low, you should take steps to improve your credit score to increase your chances of getting a better loan deal.
The decision to take out a loan isn’t one you should take lightly. Consider your financial situation first and if you decide to go ahead and apply for a loan, take the appropriate steps to get an affordable loan deal.
(Disclaimer: This content is a partnered post. This material is provided as news and general information. It should not be construed as an endorsement of any investment service. The opinions expressed are the personal views and experience of the author, and no recommendation is made.)