Whether you need to take out a loan to cover the cost of unexpected bills, you are moving house, or considering starting your own business – you must understand what you are signing up for and how the loan itself works. After all, you don’t want to end up in a tricky financial situation due to the fact you simply don’t understand what you are signing. With that in mind, here are some things you need to think about before taking out a loan.
- Do I understand what I am doing?
It’s no secret that the world of finance and loans can be difficult to navigate, especially if you have never taken out a loan before. You may feel completely lost or bewildered during the conversation. While you will hear phrases such as, ‘loan agreement’ and ‘initiation fees’, being thrown around, you might not understand what they mean straight away. Therefore, you must take the time to better understand personal loan terminology before you begin the process. You need to understand the kind of loan you are taking out, any interest you will be paying, and how the repayment plan will go ahead.
- How much can I afford to lend?
If you have lost your job, or are dealing with money problems due to the pandemic, you may feel as though you need to take out as much money as possible to keep you afloat and support your family. However, you must think about this realistically beforehand. You should not take out more money than you can pay back over time, and when you consider interest rates, you need to be careful to ensure that you do not land yourself in unnecessary debts. Keep track of the payments you need to make, and take out the exact amount as opposed to anything higher.
- How will I repay the loan?
When you agree to take out a loan, you will likely agree on a repayment plan with the lender. This could be staggered over several months, allowing you to pay in increments until you have completely repaid your loan. It’s important that you put practical steps in place to ensure you can meet these repayments. You should set aside the money for the repayment from the rest of your money to ensure you don’t accidentally spend it, perhaps in a savings account or something similar. Be strict with yourself and don’t dip into this money as late repayments often have consequences.
- What else can I do to save money?
Whilst a loan may be necessary to guide you through the month until you receive your next paycheck, you should also consider how you can reduce your day to day spending to better support yourself. There are numerous small changes you can make each day which can curb any negative spending habits you have. For example:
- Make coffee at home.
- Plan your meals for the week and buy only the ingredients you need
- Consider shopping second hand
- Sell unwanted books, clothes, or DVDs online.
- Set yourself a daily/weekly budget and stick to it.