Been thinking of taking out a loan? Borrowing money should never be an impulsive decision and is something that you should approach with careful consideration.
There are lots of different loans out there – some may be better for you needs than others.
You may even want to consider other forms of funding that could prevent you getting in debt.
Here are just five questions to ask yourself that could help you to make the right decision.
Is it for a good cause?
The first thing you should consider when taking out a loan is whether its for a good cause. Emergencies such as car repairs, medical bills and funeral costs are all good causes in which you may want to borrow money fast.
There are also non-emergency causes in which a loan could help you to make a positive investment – this could include buying a house or starting a business, which you may not be able to do without a loan as saving up could be impossible.
It’s okay to take out a loan for person luxuries such as a wedding, vacation or new car, but you may want to consider whether other funding options would be better suited.
As for unhealthy habits such as alcohol or drugs, these are obviously bad causes to take out a loan out for. One thing you should certainly never do is borrow money to gamble with – your gambling with somebody else’s money and if you lose it all you’ll be paying off an unnecessary debt.
Is my credit score good enough?
Many lenders will want to look at your credit score to determine whether you’re a trustworthy enough spender who is likely to make their repayments on time.
Getting rejected because your credit score is too low could result in your score being lowered even further. As a result it’s important to consider your credit score before taking out a loan.
Fortunately there are lenders such as Jora Credit that specialise in loans for people with bad credit. These may have higher interest rates, but could still give you access to the money you need. If you’d prefer not to pay these higher interest rates, you may want to consider another form of funding such as borrowing from a relative, saving up the funds or selling your clutter for cash.
You can check you credit score using sites such as ClearScore. If your credit score is low, there are many ways in which you can improve it – these may take time but are worth looking into in order to help you win back control over your spending.
How much do I need to borrow?
It’s worth also considering how much you want to borrow, as this could affect your options. There are specialist lenders that can offer large amounts and specialist lenders that deal with small amounts.
In the case of large loans, you’re best hiring a broker to help you find the best deal. Big loans such as mortgages are some of the biggest debts you’re likely to take on and it’s important that you find the best interest rates and down payment option for you. Non-loan options that can be good for big amounts include a home equity release or even borrowing money from your retirement fund.
In the case of small loans, there are many dealers that can offer small amounts relatively quickly. These can be great options if you’re running short of cash just before payday. A credit card is also useful to have for these small expenses (so long as you feel you have the willpower not to use it on unnecessary expenses).
How soon do I need the money?
It’s also important to consider how soon you need the money – is it a serious emergency or can you spare a few days or week to gather the funds?
There are some lenders that can have your money in the bank within the same day, whilst others may require a longer period. The size of the loan can play a large part in this, although it is possible to find large emergency loans that can be processed within a few days providing the circumstances are an emergency.
There are many other funding options that you could consider, depending on how soon you need the money. When it comes to selling clutter for cash, approaching a pawnbroker or second-hand shop could be ideal for raising cash fast, whilst selling your items on Gumtree could be a better option if you’ve got more time to raise the funds.
How much can I afford to pay back each month?
When taking out a loan, it’s also important to consider how much you’ll be paying back each month. Many people don’t consider the impact that loan repayments can have on their monthly budget – if you’re already struggling to pay the bills each month, having to then pay an extra monthly loan repayment could push you over the edge or lead to arrears with other bill providers.
As a result, many people can find themselves in a downward spiral of debt, in which debt repayments create extra debts.
It’s possible to extend a loan and pay it off in smaller instalments each month to make it more manageable, however the loan could accumulate more interest when paid over a long period.
Paying off a loan in larger installments over a shorter amount of time could result in less interest overall, however unless you’re on a good income you may not be able to afford this.