How to Take Out a Loan
The recent economic recession has put the brakes on easy credit, cheap loans and a culture based on financial risk-taking.
With banks more reticent about lending to customers, finding a loan or finance has become more challenging.
So if you are thinking about taking out a loan, what do you need to consider? A long-term commitment Stability is finally starting to return to the financial markets.
Banks, now less fearful of collapse and thanks to a large injection of cash into the economy from the government, are now starting to think about lending once again, but this time the lessons have been learned from the previous decades' exuberance and loans are far more tightly regulated.
This doesn't mean that they're harder to find; just that lenders are being a little more cautious about how much they lend and whom they lend it to.
But people still need to borrow money, whether that's for a home improvement, a new car or a broken down washing machine.
However, obtaining a loan is a long-term commitment and it's worthwhile thinking not just about your immediate situation, but your prospects for the future as well.
So before you sign on the dotted line, there are a few things to look at.
Be honest with yourself - taking out a loan means that your financial history will be scrutinised carefully.
If you are struggling to make mortgage payments or cope with daily living expenses already, you may find that taking out a loan compounds the situation.
It may help in the short term, but loans are typically not short-term options and you may find yourself in financial difficulties later on.
By analysing your current cash flow, you will be able to determine if a loan is a practical option both now and over the coming months.
If you do choose to take out a loan, a personal 'financial audit' will help you to decide whether you will be able to meet the monthly repayments comfortably without placing additional strain on your finances.
It could also give you an idea as to where your money is going and how you could make savings by doing simple things like switching your utilities or insurance providers.
Never borrow more than you have to.
The temptation is to add a 'little bit extra' on top, just in case.
But this will give you a larger commitment, larger monthly repayments and higher interest charges as well.
Remember that you are not just borrowing a set amount - the level of APR (Annual Percentage Rate) will increase how much you have pay back to the lender.
The best way to minimise this is to use a comparison site to help you find lenders with the lowest APR charges (and also any other extra charges that taking out a loan may incur).
Crunching the numbers Another thing to look at is what is becoming known as the TAR or total amount repayable.
Fixed rate loans may appear to be cheaper initially, but once the fixed rate period ends you may find that the cost of your loan increases as the interest rate becomes variable.
Make sure that you read the small print, as there may be hidden charges such as a penalty for early repayment or extra costs for any correspondence the loan provider may send to you.
All of these extras can add up so you need to do your homework before you start.
If in doubt, talk to a financial advisor who will be able to sit down with you and work out exactly how much you can afford to borrow.
Taking out a loan represents an ongoing financial commitment, and if you default on repayments it could affect your credit history.
Late payments or defaults can damage your credit rating, making it difficult for you to apply for credit or loans at a later date, so the key is to ensure that you are not overstretching yourself.
If you are unsure as to whether your credit rating will enable you to take out a loan, a good plan is to check your credit rating first with one of the companies that provide information on your credit history.
If you have a good credit rating, you will find it easier to be accepted for a loan.
With banks more reticent about lending to customers, finding a loan or finance has become more challenging.
So if you are thinking about taking out a loan, what do you need to consider? A long-term commitment Stability is finally starting to return to the financial markets.
Banks, now less fearful of collapse and thanks to a large injection of cash into the economy from the government, are now starting to think about lending once again, but this time the lessons have been learned from the previous decades' exuberance and loans are far more tightly regulated.
This doesn't mean that they're harder to find; just that lenders are being a little more cautious about how much they lend and whom they lend it to.
But people still need to borrow money, whether that's for a home improvement, a new car or a broken down washing machine.
However, obtaining a loan is a long-term commitment and it's worthwhile thinking not just about your immediate situation, but your prospects for the future as well.
So before you sign on the dotted line, there are a few things to look at.
Be honest with yourself - taking out a loan means that your financial history will be scrutinised carefully.
If you are struggling to make mortgage payments or cope with daily living expenses already, you may find that taking out a loan compounds the situation.
It may help in the short term, but loans are typically not short-term options and you may find yourself in financial difficulties later on.
By analysing your current cash flow, you will be able to determine if a loan is a practical option both now and over the coming months.
If you do choose to take out a loan, a personal 'financial audit' will help you to decide whether you will be able to meet the monthly repayments comfortably without placing additional strain on your finances.
It could also give you an idea as to where your money is going and how you could make savings by doing simple things like switching your utilities or insurance providers.
Never borrow more than you have to.
The temptation is to add a 'little bit extra' on top, just in case.
But this will give you a larger commitment, larger monthly repayments and higher interest charges as well.
Remember that you are not just borrowing a set amount - the level of APR (Annual Percentage Rate) will increase how much you have pay back to the lender.
The best way to minimise this is to use a comparison site to help you find lenders with the lowest APR charges (and also any other extra charges that taking out a loan may incur).
Crunching the numbers Another thing to look at is what is becoming known as the TAR or total amount repayable.
Fixed rate loans may appear to be cheaper initially, but once the fixed rate period ends you may find that the cost of your loan increases as the interest rate becomes variable.
Make sure that you read the small print, as there may be hidden charges such as a penalty for early repayment or extra costs for any correspondence the loan provider may send to you.
All of these extras can add up so you need to do your homework before you start.
If in doubt, talk to a financial advisor who will be able to sit down with you and work out exactly how much you can afford to borrow.
Taking out a loan represents an ongoing financial commitment, and if you default on repayments it could affect your credit history.
Late payments or defaults can damage your credit rating, making it difficult for you to apply for credit or loans at a later date, so the key is to ensure that you are not overstretching yourself.
If you are unsure as to whether your credit rating will enable you to take out a loan, a good plan is to check your credit rating first with one of the companies that provide information on your credit history.
If you have a good credit rating, you will find it easier to be accepted for a loan.
