You should always do your research and think very carefully before accessing any form of consumer credit product. Whether it’s payday loans, credit cards or a personal loan from a bank, no form of consumer borrowing is the same, with several big differences that will determine the best option for you.
With that in mind, here are three questions you should ask yourself before applying for a loan.
Question 1: Do I really need a loan?
The most important question to ask is whether you need the loan at all. Consumer credit is so readily available these days that many people borrow money simply because they can. However, the longer-term consequences of that borrowing decision can be significant and impact on your future wealth. For that reason, it’s vitally important that you only borrow money when you need to, rather than simply when you want to.
A good reason for borrowing money could be to help you achieve your long-term financial goals, such as owning a house, financing your education or starting a business. In the short-term, an appropriate reason to borrow money could be to pay for vehicle repairs or to buy a new kitchen appliance if one of yours breaks down.
Question 2: Can I afford to repay it?
If you decide that you do need a loan, the next step is to think about how you’ll repay it. No matter what consumer credit product you choose to use, you will have to pay it back, along with interest and any other charges that are applied. Fail to do so and your credit rating will take a hit, which will affect your ability to access affordable credit in the future.
Knowing exactly how much money you have coming in and going out every month is the only way to determine whether you can afford to repay a loan. To do that, you should draw up a household budget, which this budget planner will help you with.
If your budget shows that you have little or no spare funds available to make the debt repayments, you should not apply for a loan. If you have enough spare cash to comfortably afford the repayments, your next job is to assess the various credit options available.
Question 3: What type of loan should I choose?
Once you’ve decided that borrowing money is essential and you’re sure you can afford it, you must scour the market to find the most affordable and appropriate product for you. If you have a good credit score, you will have a broad wide range of options available to you, which can make the process more difficult. We recommend checking out this guide on choosing the right loan,
As a simple rule, the right loan for you will be the product with the lowest interest rate and the most appropriate repayment term. However, there may also be other factors, such as a bad credit rating or an urgent need for the money, that influence your decision. As well as loans, credit cards and overdrafts might also be an option, so make sure you weigh up the pros and cons of each borrowing type before you make your decision.
Are there any questions you think we should add to our list? Please share your thoughts with our readers in the comments below.