While there is no such thing as a perfect loan, depending on your circumstances different loans will suit you to different extents. Answering these questions may help you to work out what kind of loan would be best for you.
What Do You Want from Your Loan?
The first, and most important, step in finding the right loan for you is working out what exactly you want from a loan. How much money do you want to borrow and how long a period of time do you want to pay it back over?
Once you’ve thought this through and have an idea of what it is you’d like out of a loan it makes it much easier to compare different lenders’ rates.
Do You Understand Interest?
The main thing to consider when approaching applying for a loan is the APR of that loan. APR stands for Annual Percentage Rate and is the amount you’ll pay each year of your loan. This is based on the interest rate of the loan and any additional charges you may have to pay.
A simple way of looking for the best loan for you might be to simply look for the lowest APR, as this incurs the least extra cost while paying your loan back.
Do You Know What You’re Getting from this Loan?
Once you think you’ve picked a loan which fits what you are looking for, it’s important to look further into it and make sure you know all the facts.
While interest rates are important, you should know the other features of any loans you are considering applying for. For example, are there handling fees that you have to pay? Can you pay your loan back early if you want to? These features can make loans more or less expensive so can be helpful to look at when comparing loans with similar interest rates.
How Much Can You Borrow?
Beyond the fact that you will have to pay back any money you borrow, there are other reasons to consider carefully how large a loan you are going to apply for. There are even ways you could decrease your interest rates by increasing this amount.
This is because many lenders charge less interest if you borrow more, and it may not take as much of an increase as you expect to enter the next bracket and pay a significantly decreased rate of interest on your loan.
Where are You Applying?
Many different places provide loans; banks, building societies and supermarkets all offer different options and rates can be very competitive. This makes it a good idea to do a lot of shopping around.
You should, however, be careful to apply to reputable loan providers rather than smaller companies you may not have heard of. These often have high interest rates and are less likely to allow you to pay off your loan early without incurring heavy penalties. You should also be aware that the advertised interest rate for the lender may not be the rate you get, depending on your credit history, employment stability and other factors.
Do You Have a Poor Credit Score?
The higher your credit score the more likely you are to be accepted by the loan you are applying for. This is why it’s a bad idea to apply to several loans at the same time, as the checks they perform on your credit record can damage your score if too many happen in too short a time.
If you are unsuccessful in applying for a loan it can also damage your credit score so it’s always a good idea to be cautious with where you apply. There are ‘quotation search’ tools which use your personal details to tell you what loans you are likely to be accepted for, a risk-free method of trying out the market without causing permanent damage to your chances.
How Long Will You Take to Pay Off Your Loan?
Borrowing can be done over a wide variety of time periods, five or ten-year loans being common though shorter periods are popular and longer-term borrowing is also available.
Although long term borrowing can seem appealing as it reduces the monthly payments made on a loan, it also leads to a build-up of interest which may make your loan much more expensive in the long run.
If you are looking for a substantial long-term loan, a mortgage may be the best option for you, rather than a personal loan. On the other hand, if you are looking for a smaller amount than is usually offered in a personal loan, a credit card may be what you are looking for. This is especially true if you get a 0% interest offer on a new card and pay off the card before the offer expires.
Does Your Bank Offer Preferential Treatment?
The best choice for you may be to stay with the same people who handle the rest of your financial business. This is worth considering both for the sake of convenience and the growing trend of banks offering deals on other products for their existing customers.
Do You Really Need a Loan?
While it’s likely that you have already thought this through, it is always a good idea to do another quick check to make sure this is the right option for you.
If the loan would be for paying off some form of pre-existing debt then it could end up pushing you further into that debt, making your situation worse. If this is the case, think very carefully about taking on further borrowing.
If the loan is for a large purchase, such as a new TV, car, or other expensive household item, then consider waiting until you can save some more money on your own. While this is a less risky situation then possibly putting yourself further into debt, it might not be worth taking the risk at all.