At some point in your life it is likely that you will need to take out a loan. Whether for home or work, taking on a loan is a big commitment and something you should consider carefully.
If you’re thinking about taking out a loan, here are five things to consider before applying:
1. How will I use the money?
Before you apply for a loan, you need to sit down and think carefully about how you will spend the money. Whatever you need the money for, try to write down where every penny of it will go. This will not only help you to calculate exactly how much you need to borrow, it will also stop you spending the money unnecessarily.
2. How much can I afford to pay back?
Receiving the money is all well and good, but at some point you’ll have to pay it back. How much and how quickly will depend on the type of loan you get and the amount you borrow but ensuring you can cover repayments is crucial for long term financial stability.
Personal loans are available from numerous banks and companies but make sure you read the small print as missed payments can become expensive and will most likely affect your credit rating.
3. How long do I need the money for?
How long you’ll need the money for will affect how much you’ll pay back in total but is also something you need to consider as part of your long term budgeting.
If you’re taking out a large loan, you may be in debt for a long time and this can affect other aspects of your financial life. Being in long-term debt can put pressure on household finances so make sure you know what you’re taking on.
4. Do I have other existing loans to pay off?
If you’ve previously taken out loans, applying for more could pile extra pressure onto your funds. Though you may be coping with your current repayments, adding in more could cause trouble.
If you do have existing loans, consider borrowing more now and using this money to pay off your previous debts, consolidating your finances and leaving you with one monthly repayment. There are plenty of organisations who offer free and impartial financial advice if you want to discuss these options further before making a decision.
5. What if my circumstances change?
No one can predict the future and if your circumstances change then your ability to make repayments will almost certainly be affected. If you can, try and come up with a plan for coping with the unexpected. Selling a car or downsizing your home are drastic examples but knowing what might be necessary is a good way to stay prepared.
Applying for a loan may seem like a big commitment but if you’re realistic about how much you need to borrow, how long you’ll need it for and what you can pay back, it should be nothing but beneficial.