THINKING ABOUT A LOAN? 5 QUESTIONS TO ASK YOURSELF FIRST

With many household budgets finely balanced, borrowing money for a major purchase – such as a car or a home renovation – can seem like a good option.

But it’s important to make sure you fully understand all the implications of borrowing before going ahead and think things through carefully – and consider any alternative options available.

Paul Went, consumer managing director of Shawbrook Bank suggests five key questions you could ask yourself before you borrow money or take out a loan…

1. What do you need the money for?

Before you borrow money, make sure you ask yourself exactly what you need the money for. This will help you to manage it responsibly. The purpose of the loan may be taken into consideration, so make sure you can show you have put some thought into it before applying.

2. How much will it cost?

The APR, or annual percentage rate, is the cost of borrowing money, which helps borrowers to compare deals before taking out a loan.

Bear in mind that some lenders display their ‘representative APR’ in their advertising. This is offered to at least 51% of their successful applicants. The other 49% could end up getting a different rate. So while it’s a helpful comparison tool, you shouldn’t rely on the representative APR as a guarantee for how much you will end up paying.

Sometimes, people may only find out what their personalised APR is once they have applied for the loan and a ‘hard’ credit search has been carried out. A hard search will leave a footprint on your credit file that is visible to other lenders. It can impact credit scores and can harm them if multiple hard searches are undertaken within a short space of time.

However, it is also possible for lenders to carry out ‘soft’ searches, which don’t leave an impact on credit files. Shawbrook uses soft credit searches and if it thinks it can lend to someone, it will give them a quote for a guaranteed personalised rate right from the start. Other lenders may also offer personal quotes without leaving a credit footprint, so it is worth checking.

3. Can you afford it?

If you take out a personal loan, you’ll generally be required to repay in monthly instalments. Providers will only lend to you if they think you can afford the loan, but it’s also important that you take into consideration not just your current financial situation, but what the outlook is for the longer-term until the repayments are finished.

Having a monthly budget, so you don’t go off track, may help. And if you can, try and have some savings outside of your repayments as a buffer, which could help you make repayments if your circumstances change.

4. How should you borrow money and how much do you need?

Always choose the option best suited to your situation. Personal loans, for example, are generally more suited to borrowing larger sums that you pay off over a longer period of time.

If you’re unsure on the best option, you could try speaking to your bank or a financial adviser. They’ll be able to guide you on the different products and associated fees. There are also lots of free online guides, tools and services available that can help you understand your options too, like the Money Advice Service

5. What is your credit score?

A credit score reflects how you’ve managed credit in the past and is taken into consideration when a lender is assessing your application.

You might consider trying to improve your score before you apply. There are quick and simple ways that may help you to boost your credit score, like registering on the electoral roll, checking for any mistakes on your credit report, or cutting any financial associations with ex-partners.

A few more things to consider…

As well as Went’s tips, it may also be worth considering the options for making overpayments on any loan, which could cut the overall cost of borrowing. You may also want to consider options such as credit cards with an initial zero interest period, bearing in mind what the charges will be once the initial period ends.

The APR offered on a loan by a particular bank or building society may also vary depending on how much you want to borrow. And as well as the high street banks, you could also consider other borrowing options, such as credit unions.

Borrowing money is never something that should be entered into lightly, and if you do need credit, think carefully, and make sure you shop around for the most suitable deal for your needs.

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