What to consider before taking out a loan

There are many different loans you can take out privately. Some of these are extremely common: the majority of people will at some point take out a student or mortgage loan. In addition, there is the straightforward bank loan and loans from family or friends. Whatever their fancy titles, most loans fall into two main types: secured and unsecured. Secured means that the loan is guaranteed by an asset. The mortgage is the most common type of secured loan but there are also specialised options such as the logbook loan, secured against your vehicle.  Executors loans can be just as useful if you need to pay inheritance tax before you can access the assets of the estate. Unsecured loans are granted without any assets used as security, you will be assessed purely on your income, credit score, and ability to pay the loan back. 

Below, we explore the essential considerations before taking out a loan.

How much do I need?

The first thing that should inform your decision is how much money you need. If the amount is less than £200, it could be worth avoiding a loan and asking your family for a little help. However, a loan can be useful if the sum is larger than this. You should also ensure that you don’t borrow too little money or too much – you don’t want to end up having to ask for more money in the near future or paying interest on money you don’t need. 

Your financial situation

You should also carefully consider your financial situation too. Take a look at your current balance, your incomings and your outgoings. From there, you should be able to calculate if a loan is essential. If you do need a loan, you should project what your repayments will be each month. This should then be factored into a budget that allows you to meet your financial obligations while still living your life fully.

Length and interest rate of the loan

At this point, you should explore the different lengths and interest rates available to you. Ideally, you should take out a loan for the shortest duration possible, with the lowest interest rates. Consider your financial situation and your budget to determine what this period could be. 

Find out your credit score

If you’re interested in taking out a loan, you should also consider your credit score. This is a score that determines your trustworthiness with credit – this is based on your financial history. If your score isn’t high enough then you might not have access to loans. There are ways to boost your credit score in advance though if you’re worried that it might not be high enough. 

Applying for a loan is an important decision that shouldn’t be taken lightly. And by following the advice above, you should be all set to make an informed, considered decision that’s best for you.