Many of our purchasing decisions in 2019 are dominated by the use of a simple Google search.
If it comes up first and appears to have what we need, then why go elsewhere?
But all products aren’t created equal, and this is never more true when we’re talking about finance products – particularly loans.
There’s no loan that’s inherently ‘good’ or ‘bad’, more that there are some out there that will be more suited to your circumstances than others.
You might hear a lot of talk about ‘short-term high-cost loans’ or ‘payday loans’ as a bad option, and that’s sometimes the case, but not always.
Essentially, you should always check to see if a loan is right for you using the following factors:
MSE money mantra
Before you ‘buy’ anything (and remember, a loan is a product you buy and not ‘free money’), this money mantra from MoneySavingExpert is genuinely a godsend.
If you’re skint, you ask yourself:
- Do I need it?
- Can I afford it?
If you’re not skint, ask yourself?
- Will I use it?
- Is it worth it?
You might be getting a loan for a number of reasons.
Perhaps it’s because you’re short on cash for living expenses. But do you really need a loan, or is there money in savings or that could be borrowed from family or friends for cheaper?
If it’s for a product like a car or home improvements, do you really to take out a loan, or could you buy something cheaper or make improvements gradually?
There will be times when the answer is yes to these questions, but it’s important to ensure you’re making the right decision in taking out any form of credit before you do so.
Good and bad debt
We’ve spoken before about ‘good’ and ‘bad debt’ – in particular looking at mortgages.
Although all debt is technically debt, some is considered better than others if it increases your overall wealth.
Is the loan, like a mortgage or student loan, actually going to make you money in the long-run? Or, like how a car depreciates once it leaves the forecourt, is it going to lose you money long-term.
That’s not to say you should never take out debt that won’t directly make you wealthier. For example, although that car will be worth less by the end of your repayments, it might be an essential to get you to work each day or take your children to school.
But, it puts things in perspective when it comes to whether your loan is a good one for you. Could you, instead of financing a new car, opt for a used model that’ll cost you less and help balance the books more?
Interest
Interest is one of the main things you should look at when taking out a loan. This is the extra you’ll pay back as a sort of ‘cost of borrowing’.
Typically, when it comes to a loan, you’ll see this written as APR, which means annual percentage rate.
So, if you borrowed £1,000 over the course of a year with 10% APR, you’ll pay back £1,100 in total (which includes the principal cost of the loan and the added interest they charge).
This can become more complicated when it comes to shorter term loans, and it’s why you might see might higher APRs on payday loans. They’re still an expensive way to borrow, but if the APR is 1,000%, you won’t necessarily pay back 1000x what you borrowed, as you might pay the full amount back within 30 days.
In general, the lower interest rate, the better. But, it must be factored into how long it takes to pay it back, and assessed as the overall cost of borrowing rather than just a standalone number.
Repayment time
As mentioned, take a look at how long you’ll pay back the loan. Some might need the money immediately but be able to pay it back sooner, so for them it won’t make sense to repay over the course of a number of years.
Others are looking to split the cost of a large purchase, in which case small repayments over time is the ideal solution.
It’s absolutely about how the repayment time affects the cost of the loan, but also about deciding whether it suits your needs and budget/income.
Penalties for early repayment
Some loan companies will have penalties in place for early repayment.
This can be bad for people who come into money further down the line and want to close the account, or those who’d prefer a bit of flexibility.
Check the terms and conditions of the loan beforehand to see if this is the case.
Eligibility
A loan can have a tiny interest rate and be as flexible as you like, but if you’re not the ‘right’ customer for that lender, you won’t be accepted.
Some companies will let you check whether you’re eligible before you actually apply (this is normally a soft search, which shouldn’t affect your credit rating), which can make things less daunting.
Secured or unsecured
An unsecured loan is one that isn’t subject to any collateral – for example property. A secured one is, so if you fail to pay back the money, the lender can seize your goods as a form of payment.
Neither of these makes a loan good or bad, because there’s always something at stake (most notably, your credit rating and financial future).
However, secured loans tend to have lower interest rates and higher credit limits, so they make more sense for loans like mortgages or car finance.
Unsecured loans on the other hand might be better for people who don’t have assets such as that – for example, those who are renting and don’t own high-value items.
Guarantors
To increase your chances of eligibility by removing risk, some lenders will ask for a guarantor.
This is a person who will co-sign your loan, agreeing to pay it back if you fail to do so.
While guarantor loans are billed as a lower interest option for people who need payday-style borrowing, it’s not for everyone.
For one, your guarantor may have to meet certain criteria such as being a homeowner. There also could be personal ramifications if a family member or friend is left paying off debt you couldn’t.
Think carefully before asking someone to guarantor a loan, and ensure they understand the process before they sign on the dotted line.
Reviews
Like any other product, loan companies also have online reviews.
Companies like Feefo compile reviews from real customers, asking them about how they’d rate the service they received. From there, you can check and see whether things are legit, and whether they’re the right lender for you.
To determine a good loan requires looking at a whole host of factors, but whether it’s from a good lender or not can only be found out through how they’ve treated past customers.
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source https://metro.co.uk/2019/11/24/how-to-tell-if-a-loan-is-good-11205848/
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