Thinking of taking out a loan? Borrowing money should never be an impulsive decision. Here are five questions to ask yourself before you take out a loan in order to ensure that you make the right choice.
Why do you need to take out a loan?
There are countless reasons as to why you may want to take out a loan. It could be to cover an emergency cost such as car repairs. It could be for a personal luxury such as a car or a holiday. Ultimately, you should ensure that it’s for a good cause. You should avoid borrowing money to pay off other debts and you should never borrow money to gamble with. In other circumstances such as funding a night out or a holiday, you may want to carefully consider whether it’s something you’d be better of saving for rather than putting yourself in debt. Be wary that there are specialist loans for specialist causes that could offer better interest rates such as business loans, medical loans and funeral loans. For example, CareCredit offers medical loans with 0% interest.
How much money do you need?
If you need a large amount of money, you may find that you’re limited to certain specialist lenders – many loan companies won’t lend more than a few thousand. One of the biggest loans you can take out is a mortgage and there are specialist lenders out there such as Enness that deal with particularly large mortgages. Know when you’re asking for too much – there could come a point when you have to accept something is out of your price range.
How soon do you need the money?
You should also consider how soon you need the money. Some forms of borrowing such as bank loans can have processing times lasting several months. If you need money sooner, you may be better off using a credit card or using a payday loan. Weigh up the pros and cons, as these faster lending options could come with higher interest rates or shorter repayment periods. Remember that loans aren’t the only way of getting emergency cash – you could sell unwanted possessions or ask your employer for a cash advance and not put yourself in debt.
How good is your credit score?
Your credit score could affect your ability to take out loans. Many lenders may reject you if your score is too low. That said, you may be able to still take out a loan with bad credit at Payday Pixie or another specialist lender – just ensure that you’re aware of the conditions such as a short repayment period or high interest rates. Improving your credit score could help you to gain access to a wider range of loans – there are special credit builder schemes for this purpose.
How much can you afford to pay each month?
Most people don’t consider the added monthly costs of loan repayments. Make sure that you can realistically afford to pay back a loan. You can opt for extended loans that come with smaller monthly instalments, but these can result in more overall interest, so you could be paying more in the long run. Don’t take out a loan if you’re already struggling to pay monthly bills, otherwise you could fall in arrears and accumulate other debts, leading to a downward spiral that will be difficult to get out of.
