Hints and tips for taking out a loan
The vast majority of people will take out a loan at some point in their lives, however, getting into debt is a big responsibility and should not be taken lightly. While it’s always preferential to save rather than to borrow, there are times when you simply won’t have any choice other than to ask for a loan.
By taking a few simple precautions and following some basic advice, you can find the loan deal that’s right for you. Read on for some top tips and questions to ask yourself before getting into debt.
Do you really need to borrow, or is there a better alternative?
The biggest loan most people ever take out is likely to be a mortgage on a home, however, there are other times in when life when you might feel you need to borrow to cover unexpected expenses like an accident or medical expenses. In an ideal world, we would all have enough money behind us to cover every eventuality, but recent US studies found around 69% of all Americans don’t even have savings of $1000.
The most important thing to decide is whether you need to borrow or not. The reality is paying back a loan often takes significantly longer than saving for the same amount. Also, it’s worth remembering a loan will cost significantly more to pay back because of interest charges. Saving will always be the better option if you can wait and have the time to build the funds. Unfortunately, in our ‘need it yesterday’ culture, many people make the mistake of taking out a personal loan for things they don’t, in reality, even need. As a rule, if you can save rather than borrow, the saving will always be the better option.
All that being said, sometimes circumstances dictate that taking out a loan is your only option. In these instances, it’s important you make the most informed decision and choose the loan that’s right for you, with the best terms and interest rates.
Decide how much you need – and what you can afford to pay back
More often than not, the amount you need to borrow will be dictated for you already, but with so many loan companies now offering credit, it can sometimes be tempting to borrow more than you need.
Also, people often make the mistake of borrowing more than they can afford to pay back. Remember, you will be liable for whatever you borrow, typically repaying the sum over several years in monthly payments, so check how much you’ll be expected to pay and factor that figure into your existing monthly outgoings.
As well as thinking about your monthly payments, you should also check the Total Amount Repayable on a loan (often referred to simply as TAR). The total amount you’re expected to pay back includes the interest charges and gives a far more accurate idea of the amount you’re borrowing.
Check your credit score before you apply for a loan
Your credit score (and credit history) is one of the most important influencing factors that can affect your eligibility for a loan and your chances of being able to borrow. Recent studies suggest as much as71% of the US population are unaware of how their credit score can affect their chances of borrowing.
An adverse credit score will reduce your chances of qualifying for lower rate and shorter-term loans, so it’s extremely important you have at least some idea of your credit ranking. Moreover, applying for a loan and getting refused can often work against your credit rating – so it’s best to do some research first.
There are countless online credit score evaluation tools you can use or you can even apply direct with the three main credit bureaus – Experian, Equifax and TransUnion – each of which is obliged to give you a free copy of your official credit standing annually.
Study the terms, APR and small print
The devil really is in the detail when it comes to borrowing and it’s essential you comprehensively study the terms and conditions of any loan before committing. Also, you should check what happens if you default for any reason on payments. Many reputable loan companies will reference the FDCPA rights for consumers (or at least redirect you to them), but you should also be aware of them, should the worst happen and you find yourself in times of trouble or being unable to make payments. Loan agencies have an obligation of care to their clients and cannot unfairly pressure you if you fail to make payments.
Of equal importance is the Annual Percentage Rate (APR) of your loan. Also, be sure to check whether your APR is exact or representative – there can be a world of difference between the two. The representative rate of a loan is the interest rate that a lender needs to apply to 51% of all applicants – in other words, if for whatever reason you happen to fall into the other 49%, you will likely be charged a different rate. In truth, in most cases, you will be charged significantly more.
Shop around for the best deal
There is always a temptation to go with a financial institution you already know (e.g. your current bank), but you’ll often find there are considerably better deals available by shopping around – particularly checking with online lenders. Money lending is big business and, with so many independent operators now in the market, there are deals to be found if you look hard enough.
A good starting point is to check online with money and loan comparison websites to get an overview of what’s available. Also, don’t forget to check the bigger, established lenders who sometimes run time-limited reduced rate loan offers at bargain rates. Again, always check the small print. If a deal seems too good to be true, it probably is.
Final thoughts
While saving is always the preferred option, there are times in life when you simply won’t have the time to get funds behind you and you’ll have no choice but to borrow. By following the simple hints and tips listed above, you should have a far better chance of getting the best loan at the best price on the best terms.
