As more and more lenders start offering accessible loans, individuals get increasingly comfortable with applying for them. Unfortunately, this has led to many cases in which people have disregarded the risks that are inherent to most loans and have ended up in situations where they are unable to repay the money that they’ve borrowed. Even unsecured personal loans can have a severe impact on your credit rating if you do not repay it on time.
This having been said, part of the issue is caused by lenders who create increasingly complex terms and conditions, up to the point where the average individual may not understand all of the fees, charges and clauses that he agrees to. In order to combat this problem, we have created a 5-item checklist that will help you make an informed decision.
- Have You Chosen the Right Type of Loan for the Situation?
Most banks offer a very large number of types of loans, each of which has different advantages and disadvantages. Assess your situation and your need and then look at all the loans that you can apply for. The best place to start is by analysing your monthly expenses in order to figure out how much you could repay every month.
Pay special attention to secured loans as these require collateral. The reason why you should give them extra though is that they have tangible consequences. Not repaying them on time can lead to the lender taking possession of your property.
- Use an Online Calculator or One Provided by the Lender to Calculate the Repayments
Look for an online calculator on the lender’s website that you can use to calculate your monthly repayments. Keep in mind that you will usually only get an approximate result if you apply for a variable-interest loan. This is due to the fact that the interest attached to these depends on changes in the economy.
- Is the Loan Secured? Are You Prepared for the Risk?
Check to see if the loan that you’re interested in is secured or unsecured. Unsecured ones usually have better interest rates but tend to be smaller in value. On the other hand, if you need large amounts of money, you may want to go for a secured loan. However, the lender will require collateral that is usually in the form of your home, your car, or another property.
Keep in mind that if you cannot repay a secured loan, the lender will have the right to take possession of your property, which can lead to you losing your home.
- What Is the Term for the Loan? How Much Stress Will It Put on Your Finances?
Check the agreement in order to determine the precise duration of the loan and make sure that you will be able to repay it in due time. Keep in mind that if you are applying for a loan that has a variable interest rate, there is a chance that you will have to make monthly payments that are larger than what you estimate at the beginning. This may put a lot of stress on your finances.
As a warning, remember that you may be able to change the term of the loan; however, this will also bring a modification of the interest rate.
- What Are the Exact Fees and Charges That You Have to Pay?
Most lenders advertise their loans by emphasising their APR or annual percentage rate. However, this is not always a clear indicator of what your final interest rate will be. The actual interest rate is usually determined by your financial history, various personal circumstances that may come into play, the amount of money involved, and the length of the loan.
On top of this, you may also have to pay various arrangement fees, early repayment fees if you want to repay the loan before its term, refinancing fees, and others. Look for these in the agreement and make sure that they are affordable enough to give you enough flexibility to refinance or repay your loan if the need arises.
Are You Ready for a Loan?
Look at what type of loan you need and at how much money you can afford to spend on the loan. Go through our checklist and always make sure that you only borrow what you can repay. In the long run, it may be more affordable to get multiple fixed-interest loans that have a shorter term than to get a variable interest one that spans over a decade or more.