Ask Yourself These Questions Before Getting a Loan
There are some situations where getting a loan can be useful. And while it isn’t always a good idea, in the right circumstances debt can help you achieve your goals and leave you better off in the long run.
There are also lots of different ways to borrow money, depending on your situation and what you’ll use the money for.
So if you’re thinking about borrowing money, ask yourself these questions first.
1. What’s it for?
Be clear about why you’re borrowing money and understand exactly what you’re planning to use it for. Is it for a single purchase like a new sofa or lots of little things like groceries? Maybe you want a buffer for emergencies, so you know it’s there just in case? Understanding exactly how you’ll spend the money should help you manage it responsibly. And it can also help you decide what type of credit is best for you.
2. Do you really need to?
Next, work out whether or not you really need to borrow money. If you have a large cost to cover, it could be easier to wait and save up if you can. But if you can’t afford to pay for unexpected costs, you might not have much choice. And borrowing money can also be useful for spreading the cost of unexpected costs over time.
Say you need a new car for your work, but you haven’t saved up enough to buy one outright. So you buy an affordable car using a loan, which you repay over a set period of time. You have to pay interest, so the car does cost more. But you’re better off because the loan makes it possible for you to drive to work and earn a living.
3. Will you be better off in the long run?
In some cases, borrowing money can leave you better off in the long run. For example, you can use debt to make sensible investments like getting a mortgage to buy a house that increases in value or taking out a student loan to cover education that will increase your earning potential.
4. How much do you need to borrow?
It’s smart to borrow only what you need – you don’t want to rack up debt by buying unnecessary things. Try not to underestimate the costs you need to cover though, as you may find it difficult to increase your borrowing limit later.
5. Who should you borrow from?
Shop around to better understand your options. This will help you find a good deal from a lender you trust.
6. How much will it cost?
You’ll usually pay interest for using credit. Lenders calculate interest as a percentage of the amount you owe – this is called the interest rate.
To give a simple example: if you borrow £2,000 at a fixed rate of 10%, you’ll pay £200 in interest. Bear in mind that a fixed rate will stay the same, while a variable rate can go up and down. Some lenders will charge you fees instead of (or as well as) interest. So remember to bear that in mind when you’re working out how much borrowing is going to cost you overall.
7. Can you afford it?
It’s time to see if you can afford the repayments. A good place to start is your monthly income and outgoings. Your income is anything paid into your bank account, like a salary or student loan. And your outgoings are payments coming out of your account, like rent, bills and other living expenses.
Work out how much you’ll have left at the end of the month, then see if it’ll cover the repayments to your lender. It’s also sensible to think about how you’ll cope if something goes wrong.
8. How’s your credit score?
Your credit score reflects your chances of getting approved for credit. A high credit score can help you get approved for credit, at bigger limits and cheaper rates. So it’s worth checking your credit score and if you need to, trying to improve it before you apply.