The 5 MUST Ask Questions When Borrowing Money
Taking out a loan can offer relief from a variety of financial woes. However, one of the most common mistakes people make is to dive in with two feet without thinking first.
To help you make an informed decision, we have identified the 5 questions to ask before borrowing.
Question No. 1 – How much do I need to borrow?
This may seem like a very obvious question to ask but without knowing precisely how much money you need to borrow, it will not be possible to work out which loans are likely to be available to you and how much the repayments are likely to be.
Tip – Finding the sweet spot – It is important to find the ideal balance between not borrowing too much whilst not underestimating the amount you need, which can often result in difficulties making up the shortfall a little further down the line.
By setting yourself a realistic figure which you know will be enough to cover your needs whilst remaining an affordable amount to repay, you will give yourself the best possible chance to find the most affordable deals currently available.
- For more information, please check out the following article – Can you afford to borrow money?
Question No. 2 – How long do you want the repayment term to be?
There are often 2 very different schools of thought when it comes to loan repayments.
Some people like to make the repayment period as short as possible to repay the debt at the earliest possible stage, whereas other people like to extend the period for as long as possible to keep the repayments down to a minimum.
You must base your decision on your own individual circumstances. Longer repayment periods often reduce the monthly payments due to a reduced APR but you will probably pay more overall in interest as you are borrowing the money for longer.
Decide which option offers the best solution for you.
For some further information regarding short-term vs long-term borrowing, please visit – What is long and short-term debt?
Question No. 3 – Secured or unsecured?
When it comes to borrowing money, there are two distinctly different options available, secured and unsecured loans.
There is a fundamental difference between secured and personal loans and whilst secured loans typically offer larger amounts at lower interest rates, you must fully understand the risks involved when securing a debt against your property or vehicle.
- For more information relating to the difference between these 2 types of credit, please visit the following article – ‘Secured and unsecured borrowing explained’
Question No. 4 – Would a flexible or fixed-rate loan be the right move?
Opting for a loan with a fixed interest rate will ensure that you can remain comfortable in the knowledge that you know exactly how much your repayments are going to be throughout the full duration of your loan.
However, as the name suggests, flexible loans can offer a greater degree of flexibility as any fluctuation in interest rate may result in your repayments being reduced. Of course, it could also result in your payments increasing as well!
The following video explores this question in greater detail –
- The following article offers an excellent insight into – Fixed and variable rate loans: Which is better?
Question No. 5 – Am I going to be eligible for the loan?
If you find yourself in a spot of financial difficulty, the last thing you want to do is something that may negatively impact your credit rating. Nowadays, nearly all lenders have a number of strict eligibility terms for their products and if you do not tick the right boxes, your application is very likely to be declined.
Some of the major eligibility factors include:
- Are you a UK resident?
- Do you have a regular income?
- Do you have a current account with a bank?
- How old are you?
- What are your living arrangements?
- How good is your credit rating?
Money Saving Expert takes a closer look at this in the following article – The 5 Golden Rules of Getting a Loan
Final Points to Consider
- Too many loan applications – this can make it much harder to have an application accepted as it can give the false impression that you are desperate for the money, we suggest only applying to a lender when you are pretty certain that your application will be accepted.
- Irresponsible borrowing can lead to long-term financial issues.
- Personal loan – personal loans can be used for just about any purpose such as buying a new car, paying for a holiday or consolidating debt. You may have noticed that we are a finance broker; if you are looking for a loan and have a poor credit file we offer cost-efficient guarantor loans. For more information see our homepage, FAQs or compare loans.