5 key questions to ask yourself before applying for a loan
Put in the legwork to make sure you get the right deal.
Loans can come in useful in all sorts of situations. You might require a personal loan, a business loan or a short-term loan, for example to cover a salary shortfall. Before you go ahead and make any applications it’s important to go through a number of key questions to make sure you’re ready for the loan – and so that you get the best deal.
- “What type of loan do I need?”
Personal loans can be either short-term loans such as bad credit loans – or installment loans like secured loans that you repay over a certain period of months or years. Different loans also carry different requirements in terms of your credit score and you may find that you’re eligible for some loans at a more discounted interest rate. So, start with the purpose of the loan and then look at the lenders who have products available to see what kind of loan you need.
- “How much can I afford to repay every month?”
It’s crucial that you’re able to make your loan repayments and also to cover the cost of your outgoings. Once you have calculated what you already pay out every month – as well as what comes into your account – what’s left? The amount you have remaining will need to cover the loan repayment and anything else you’re likely to need money for. It’s never a good idea to borrow if you can’t afford the repayments, as if you start to miss repayments you could end up with additional fees and charges. Missed repayments also seriously affect your credit score.
- “How much do I need to borrow?”
Best practice when it comes to loans is never to borrow more than you actually need. You will pay interest on everything that you borrow so it’s never worth borrowing more ‘just in case.’ Calculate exactly how much you need to borrow to cover whatever it is you need the cash for, whether that’s an emergency home repair or a new car. If you decide to borrow a little more than that, it’s advisable not to go over it by much.
- “What about my credit score?”
Your credit score will have a big impact on loan applications. For example, it will be used by the lender to see whether you have a history of missing repayments on loans and are therefore not a good credit risk. Borrowers also use credit scores to determine how much to offer you – and at what interest rate. So, if your credit score is currently not that impressive then it might be worth waiting until it improves so that you can borrow more – and at a better interest rate.
- “What’s the total cost of borrowing?”
It’s too easy to get stuck just looking at what your monthly repayments will be and completely miss how much the loan will cost you overall. Before you make any application make sure you understand the total cost, including total interest and total repayments. Factor in any likely fees if you decide to repay the loan early too.