People take out personal loans for a variety of reasons.
But, whether you need a payday loan to cover an unexpected expense or financing for a big purchase, it’s crucial to take everything into consideration before you go ahead.
That means gathering as much information as possible about repayments, interest fees, and what happens if you default.
To help you, we’ve rounded up the most important questions you need to ask before you take out a loan.
What You Need to Know before You Take Out a Loan
Securing a personal loan can get us out of a difficult situation, or allow us to make purchases that we wouldn’t usually be able to afford all at once.
However, there are many issues to consider about the terms of the loan and whether the repayment plan is suitable for you.
That means asking the right questions to make sure you’re fully informed.
What’s my credit score?
If you have a low credit score you may not be able to take out a loan at all. And, if you are approved for a loan, the interest rate and terms of your loan could be negatively affected by your credit score.
It’s a good idea to consider taking steps to improve a low credit score before starting the loan application process. You can do this by removing any incorrect details on your credit report, paying off small debts, and making repayments on time.
And remember, applying for the loan will impact your credit score. So, whatever your credit score, you should compare different loan options before starting the process.
What’s the application process?
You will need to know what information the loan company requires you to provide. Some companies only need your income and credit score, while others may ask for copies of tax returns and bank statements.
You should also ask how long your loan will take to be approved and how soon the money will be available to you.
Lastly, you may have to pay an application fee so you should also ask about this to ensure you get the best deal.
What is the interest rate of the loan?
The interest rate of a loan is usually shown as an annual percentage rate (APR). The APR is how much you will be expected to pay in addition to the amount borrowed, so the lower the better.
The interest rate will depend on your credit score, but it can vary a great deal between lenders.
What will the monthly payments be?
This is possibly the most important question to ask before you take out a loan.
Although the APR states the interest you will pay on your loan, the monthly payments give you a clearer idea of whether the loan will work for you.
Carefully work out a budget which includes all your current expenses. From this, you will be able to see if you can cover the monthly loan repayments without too many problems.
If it seems that paying off the loan will be a stretch then you may want to consider applying for a smaller loan.
What is the repayment period?
This is how much time you will have to repay the loan.
A shorter repayment period means that you will pay more each month. A longer period means that you will pay less each month. However, you will be paying back the money borrowed plus interest over a longer amount of time, meaning that the loan will cost you more overall.
If you know you can make the monthly repayments then a shorter period is better. But, a longer period does give you more freedom to cover unexpected costs if your budget is tight.
Is the loan secured?
A secured loan requires you to pledge assets to guarantee the loan, such as your house or car. If you default on your payments the loan company then has the right to seize those assets.
Most personal loans are not secured loans but it is best to make sure before you take out a loan.
Do I have to pay loan insurance?
Your lending company may insist that you take out loan insurance to cover the cost of repayments in case you can’t for any reason, such as illness.
If loan insurance is optional then check how much extra it would cost per month and decide if it’s something you need or not.
Can I pay it off sooner?
If your financial situation changes for the better then you may want to pay off the loan sooner.
However, some companies may charge a prepayment fee if you do want to finalize the loan before the end of the repayment period.
In addition, you may think that paying off a loan early means that you will automatically pay less interest.
Unfortunately, this is not always the case. Certain types of loans called pre-computed loans calculate how much interest you will pay off overall. If you do want to pay your loan off early then
So, make sure that your loan is a ‘simple interest loan’ to get the best deal for early repayment.
What happens if I default?
It’s important to consider that a change to your circumstances may leave you unable to make the monthly payments.
Before you take out a loan you should always ask about the penalties for late or missed payments.
With some loans, the interest rate may increase by as much as 2% if you fail to make payments on time. If it is a secured loan then you may lose your car or even your home.
Get Informed Before You Take Out A Loan
Don’t leave anything to chance when it comes to getting a loan.
Asking all of these questions should ensure that there are no surprises. However, you should also plan ahead and consider the worst case scenario before you agree to the loan conditions.
Always take your time to compare different companies and the terms they offer. This way you can see which loan is best suited to your needs and financial situation.
And, if you’re looking for a short-term loan then fill in this form to apply today.