Taking Out a Loan: Important Things to Consider

The difference between a problem debt and a useful financial tool can sometimes be whether you have made the right considerations before taking out a loan. Some of the most important things to consider are:

Alternatives

The first thing to think about is whether you really need to take out credit. Because of interest, you will end up repaying more than you borrow (with 0% credit cards being the most prominent exception), and usually the difference will be significant. That is how lenders are able to make money after all. If you could afford to use your own money to meet whatever expense you are faced with and would just prefer not to, you may want to think again as you will be better off in the long run. If you have any other alternative available, such as borrowing from a spouse or close family member, this may also be preferable. The more strain a loan is likely to put on your finances, the more important this step becomes. If you will have trouble making the repayments, or if it will leave you with little spare income for unexpected expenses, the more taking out a loan should be considered a last resort.

Types of Loan

If you have decided that a loan is your best or only option, the next step is to think about what kind of credit you wish to take out. This can make a huge difference to the kinds of interest rates that are available to you and therefore the amount you repay in the end. To take an extreme example, payday loans – which are almost always something to avoid – could come with an interest rate of well over 1,000% but the same amount may be available with a longer repayment period through a 0% credit card. In between these two extremes are things like “standard” personal loans and peer-to-peer loans.

Shopping Around

Always shop around for the best rate. Even within a single kind of product, interest rates and repayment terms can vary massively, so there is a lot to be gained from getting the best deal. As with insurance products and utility providers, online comparison websites are your best friends when you come to this step. No single comparison sites covers every lender, and some may even have access to slightly different deals from the same lender, so for best results you should use two or three different comparison tools and then find the best deal from among them all.


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