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Debt, properly managed, can be useful in helping us pay for large outgoings, like a new house or car.
And with 34% of us taking out a loan in the last year, plenty of us are taking the plunge and applying for loans to help us. But, not every type of loan is equal. Do you know what you’re looking for, and do you know if you’re eligible?
If you’re not sure, then don’t worry. We’ve got a list of 7 things to consider before you apply for any type of loan.
Purpose of Loan
What’s the purpose of the loan you’re looking to take out? Different types of loans come with different rates, lengths and conditions attached, so it’s important to consider first.
If you don’t have ‘collateral’ to offer (for instance, a house or other asset that has value), then you’ll need an unsecured loan. Interest rates will be higher, as the lender will have fewer options to recoup costs if you fail to repay.
Secured loans offer your assets as security on the loan, guaranteeing better rates. If you fail to repay, you’ll lose the asset.
There are also different types of loans for specific purposes, like auto or installment loans. If you want to find out about these, check out this guide.
Interest Rates and Affordability
Interest rates, just like the loans they’re attached to, come in different forms. Choosing the right type of interest rate is vital for determining whether you can repay your loan on time.
As we’ve already mentioned, an unsecured loan will attract a higher interest rate than a secured loan, but interest rates will also vary depending on the type of loan.
A loan with a fixed rate means you will know the exact rate of interest you’ll be paying for the term of your loan. It won’t change, so it can help you determine whether a loan is affordable for you.
A variable rate loan gives the lender the power to alter the rate, depending on current market conditions. If your rate goes up, you might find that your repayments become unaffordable.
Length of Term
Some loans can last a few months. Others, like a mortgage, could last for 30 years. Considering how long you want a loan for when you’re taking out a loan is important if you want it to be affordable.
The length will affect the interest you pay overall and the cost of your monthly repayments. If you’re borrowing for a short period, your repayments may be large, but the short period may allow you to take a poorer interest rate, so you’re paying back less in interest.
Longer loan periods, but with terrible interest rates, would mean you end up paying back more in interest. By looking at the loan term length when you’re taking out a personal loan, you can judge whether it’s good value.
The length, type of loan, and the interest rate can all affect your monthly repayments, and this is the cost you’ll be dealing with on a regular basis.
With a fixed rate of interest, your loan repayments may be static, with interest costs diminishing over time but at the same rate. If you’re on a higher or variable rate, this may vary, so be sure to check the conditions of any loan before you agree.
Other types of loans, like mortgages, come with different repayment options.
Amortization mortgages will let you pay off the full cost of the loan over the entire length of the term. Interest-only mortgages will mean you only pay off the interest, leaving you with lower monthly repayments but with the principal cost of the mortgage left to pay at the end.
Understanding how much you will have to pay throughout your loan and at the end is important, or you may end up taking out a loan you can’t afford.
Loan Providers and Evidence
Different loan providers will offer different rates and products. They’ll also target different audiences (like a bad credit provider targeting those with poor credit scores, but offering higher rates).
Some loan providers will require evidence of earnings, to be sure you can afford repayments. If you’re thinking about taking out a bank loan, they will have stricter conditions.
Online providers may be less stringent, and you may be able to secure your loan without leaving your home. They may also offer a wider variety of products, like bad credit loans, or installment loans that don’t require evidence.
If you’re looking for an installment loan with fast acceptance and a quick payout, click here.
Before you sign any credit agreement, check for any fees that crop up at a later stage.
There are likely to be different types of fees depending on the loan you want. Some lenders may charge a fee just for applying, so don’t submit an application before you’re sure.
You might also be charged a ‘servicing’ fee by the lender for managing the account or an ‘origination’ fee as an administrative cost for the lender to process the application.
If you’re on a fixed length loan term and you decide to repay early, you could also be charged fees. Be sure to verify any potential fees, before and throughout your loan term, before you agree.
Credit Scoring and Eligibility
Your credit report and score could have an impact on the type or quality of loan you’re offered.
Are personal loans bad for your credit score? No, but applying for too many in a short period of time can have an impact, as can having too much debt already. Be sure to check your credit report before you make any applications.
With a bad credit score, you’ll be locked out of better rates and more traditional lenders, so you may have to look at specific bad credit loan providers.
Bad credit can affect your eligibility for all types of loan, especially large amounts like mortgages, but it doesn’t necessarily mean you can’t get one. If your credit score is low, take a look at our 5 tips to getting a bad credit mortgage.
Taking out a Loan Doesn’t Have to Be Difficult
By considering the affordability and type of loans on offer, you can be confident of grabbing the right loan for your particular circumstances.
Investigate any lender you’re looking to borrow from and check their repayment terms, including any conditions attached.
It’s also worthwhile checking your credit history and score to evaluate the likelihood of being granted a good credit loan. Creditors will use this information to make a decision on whether they can lend to you, so be sure it’s up to date and correct, too!
Keen to learn some more about personal finance? Take a look at some of our other education articles.