10 things to consider when applying for a loan

Category: Loans
Date: 5/17/2010

Committing yourself to any borrowing requires careful thought. Ask yourself if it's something you can save for instead. Is it necessary that you make the purchase right now? Once you have questioned your motives and have decided that you still need to apply for a loan, check out our 10 key points to consider before applying for a personal loan:

Do you actually need a personal loan? Maybe a credit card might be more appropriate if you can get an interest-free purchase card and be disciplined enough to repay what you borrowed in a short space of time. So-called payday loans (a specialist type of loan where the money you borrow normally has to be repaid within a month) charge a fantastical amount of interest and should only be considered as a very last resort once you have exhausted all other avenues.

1. Itemise your income and your outgoings (mortgage, council tax, utilities). Itemise everything and be realistic – if you think you only spend £250 on groceries each month, but your previous bank statements show you spend £350: use £350! Once you have itemised all your outgoings and worked out how much you have left, then you will have a better idea how much you can afford on a monthly basis.


2. Set the loan repayment term. When taking out any loan, be it an unsecured loan, secured loan or mortgage, it is always best to set the term for as short a time as your budget allows. This will mean that your monthly repayments are higher, but over the term of the loan you will actually pay less as you will not be charged as much interest.


3. Secured vs. Unsecured? You might be forgiven for thinking that the difference between a secured and an unsecured loan is that a secured loan gives you more security. Not so! A secured loan will be attached (secured) to a piece of property, normally your house or car. If you fail to keep up with your repayments the lender can sell your property to get their money back. Secured loans tend to be available for larger amounts, over longer terms. If you are considering a secured loan, speak to your mortgage lender as well, they may be able to off you a further advance which might cost a lot less!
4. The advertised APR isn't always what you'll get. When you are comparing loans, be aware that the typical advertised APR rate isn't necessarily the rate that you will actually be offered. It is usually the case that the rate you pay is linked to your credit score, as well as to the amount you wish to borrow.


5. Don't settle for the first loan offer. Loan rates vary considerably so don't be lazy and settle for the one your bank or building society offers you, do some leg work to compare the cheapest loans and get the best deal.


6. Deferring the first payment on a loan. When you apply for a loan, a lot of lenders will allow you to defer your first payment for a couple of months. Some of them will sneakily include the deferred payment on a quote – watch out for this as it's a way lenders can squeeze more money out of you. When deferring the first payment on a loan, interest continues to be charged, increasing the overall amount you end up paying back. Think about whether you actually need to do this to alleviate the immediate pressure on your finances (you might want to pay for Christmas for instance or your annual car insurance premium). If you can afford the payment it is best to pay sooner, not having to pay for a couple of months might feel good, but you are only postponing the inevitable!


7. Early Repayment. Many lenders will charge you if you repay your loan before the end of the agreed term. If you think you might be able to repay early, you should be ready for this charge. Even better though, when selecting your loan, why not find one that doesn't have an early repayment charge at all!


8. Fees. There may be a fee payable for setting up the loan so, as ever, check the terms before you sign up – some lenders will "helpfully" offer to add this to your loan (but remember any fees added will be charged interest as well which will increase the overall cost). You might be offered a same day transfer of the loan into your bank account – there might be a charge for this.


9. Payment Protection Insurance (PPI). This type of cover has had a lot of bad press over the last few months. Basically PPI will ensure the monthly repayments are met on your loan if you are unable to make them due to sickness, an accident or unemployment. The two key things to remember are: don't settle for the quote your lender gives you (shop around or see a broker) and think carefully about whether the cover is actually necessary. Payment Protection Insurance may be worthwhile, particularly if things are tight or you are reliant on a single income. In these situations, it may be more appropriate to try to cover all of your outgoings: mortgage, utilities, insurance premiums etc. with a larger policy, normally called Accident, Sickness and Unemployment cover.


10. Credit score or credit rating. It's always a good idea to check your credit rating before you make a loan application. Remember that any declined loan applications (and declined credit card applications) will go onto your credit file as well, so don't blindly go to every lender making an application – it will become less likely that you will get a loan. If you have a poor credit history in this time of tightening criteria, you would be better to seek professional guidance on your options.

Take the chance now to compare cheap personal loans available to you.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at anytime.