13 things to consider before getting a loan:
The issue of debt management is one of the most important aspects of personal finance. Whilst daily we are bombarded by offers to get loans from credit unions and bankers it is important to properly consider the loan proposals. Poorly planned loans can be an albatross on your finance and can lead to unintended consequences like bankruptcy.
Here are the 12 things you need to consider before getting a loan:
1. Credit Rating or Credit Score.
Your credit score is a critical factor that lenders consider when you apply for a loan. A good credit rating will help you qualify for a loan with favourable terms. It is therefore imperative that you maintain a superb credit score. In the US, you can get a free credit report each year from the three credit reporting agencies (CRAs). These agencies include Equifax, Experian, and TransUnion.
2. Purpose.
Why do you need the loan? The purpose of the loan will help you determine the type of loan you need, the tenure, and the amount of money you need to borrow. The loan you will require to start a business will likely be of a longer tenure.
3. Interest rate.
This is the cost of borrowing money. The lower the interest rate, the less you will be required to pay in interest. In making your determination you will need to consider if the interest rate is compounded or simple. Interest rates can be fixed or indexed to a benchmark such as inflation. This will ultimately have an impact on the amount of money you pay as interest.
4. Collateral or Security.
Collateral is a pledge of a specified asset or property made by the borrower to a lender, to secure repayment of a loan. If the borrower defaults on the loan, the lender can foreclose the collateral and sell it to recoup lend amount. Loans are usually secured against physical assets such as vehicles and real estate , or income such as salary, pension or life insurance benefits. In most instances secured loans attract much lower interest rates than unsecured loans.
5. Tenure.
The loan tenure is the length of time you have to repay the loan. The longer the loan tenure the lower your monthly repayments will be, but you will pay more in interest over the life of the loan. You will need to strike a balance between the tenure and the interest you are prepared to pay. Mortgage loans for real estate tend to be of a longer tenure than consumption loans.
6. Repayments instalments.
Can you afford the monthly or weekly repayments? The repayments should be considered in the context of your budget. You should be able to afford the repayments without putting a lot of stress on your finances.
7. Capacity.
Before you take out a loan, make sure you can afford the repayments. If you lose your job or experience other financial hardship, you may not be able to make your payments. Therefore it is important to take some form of insurance to ensure that you will be able to meet your obligation in the unfortunate event that circumstances change in your life.
8. Prepayment penalties.
Some loans have clauses that make you pay a fee if you pay off the loan early. If you anticipate to be making prepayments on your loan to reduce the interest burden you should not consider loans with prepayment penalties.
9. Establishment costs.
There are costs associated with most loans, which are fees that are paid to the lender and other third parties for creating the loan facility. These costs can vary depending on the type of loan and the lender and usually add to the cost of the loan.
10. Fees.
Other fees may be associated with your loan, such as late payment or default fees. These fees have an impact of increasing the overall cost of the loan and should be considered carefully.
11. Other options.
Taking a loan may not be the only viable option. Before you take out a loan, consider other options, such as saving up for your purchase or using a credit card with low interest.
12. Shop around.
Compare interest rates and terms and conditions from different lenders before you choose a loan. This will help you get the best deal possible.
13. Fine print.
Before you sign any loan documents, be sure to read and understand the fine print. This will help you comprehend all of the terms and conditions of the loan. If you don’t understand something, don’t be afraid to ask the lender to explain it to you. You may need to consult your legal counsel before signing on the dotted line.
Conclusion.
Taking out a loan is a big financial decision and it should be well thought out. So it is important to weigh all of your available options and consider all of the potential consequences before you sign on the dotted line. By doing your due diligence and understanding all of the terms and conditions, you can make sure that you are getting the best deal for your needs.