Applying for a loan can feel often feel intimidating in its complexity, with so many factors to consider, from interest rates to application fees, loan terms to security but fear not. Ask yourself the four questions to ensure you have a solid idea of whether your loan offer is competitive or not.
1. How Much Will the Loan Cost Me in Total to Pay Back?
Many consumers are confused by interest rates, shown as APRs (annual percentage rates) and monthly interest rates. Still, many applicants simply look at the total repayable per month to ensure they are comfortable that they have the earnings to make each repayment.
This approach can be a mistake, where a loan might look like good value with a low repayment but could cost much more than another product over the full term. For example, the two scenarios below look at two loan quotes:
- Lender A offers a £5,000 loan over four years at a 6% APR, costing £117.43 per month and £5,636.41 overall.
- Lender B offers a £5,000 loan over three years at a 5% APR with a monthly repayment of £149.85. Over the three years, the loan will cost £5,394.76.
Option A could look preferable due to a smaller repayment – but the higher interest and longer-term mean that the borrower is paying £241.65 extra for the £32.42 saving per month.
2. Is My Interest Rate Fixed for the Duration of the Loan?
Most personal loans have a fixed rate, meaning you will make the same monthly repayments for the loan’s lifetime. However, asking the question is important because if your loan has any variable fees or interest, this could make a big difference to your risk of seeing repayments rise steeply.
3. How Long Will I Need to Keep Making Repayments?
Loan terms vary, with the shortest personal loans often running for as little as 12 months and up to three years. That said, some loan providers will offer loans that last up to a decade and may even advise borrowers to opt for a longer term to reduce their monthly outgoings.
Although an extended term may make it easier to pass affordability assessments, you should have oversight of the financial commitment you are making.
Brett Van Aswegen, CEO of Wonga, South Africa’s leading digital credit provider, urges consumers to be mindful of the terms attached to their loan – with 32% of applicants now encouraged to sign loan agreements covering over five years of repayments.
While a shorter term will mean your monthly repayments are higher, this also means you will repay the debt sooner and pay less interest overall.
Also Read : Best Hard Money Lenders Based In Texas
4. What Happens if I Miss a Repayment or Cannot Make a Repayment?
This depends where you’re reading this from but most countries have similar rules. For example, the UK’s Financial Conduct Agency (FCA) has instructed lenders to provide as much help as possible where consumers cannot keep pace with repayments due to rising living costs – but you need to know what support options are available.
Lenders may provide various options to help when borrowers experience difficulties, such as extending the term, offering a repayment holiday or even switching to an interest-only basis for the short term. However, this is not universal.
Secured loans use an asset, usually your home, as security. Knowing that your property is at risk if you do not make repayments is a significant consideration, and you should be confident you have a stable income and will be able to maintain on-time repayments until the loan debt has been cleared.
If you have posed all of these questions to your prospective lender and are still unsure whether to proceed, it is well worth conducting your own research to find the cheapest loan types available before you apply since there are significant differences between the costs and conditions linked to home loans, personal loans and instalment loans etc.
