The cost-of-living crisis has left many people seeking extra help. But even with families and professionals feeling the pinch, finance is becoming expensive and interest rates on personal loans have more than doubled.
Despite soaring interest rates and inflation, consumer credit loans have increased by at least 7% over the past year. It’s clear that finance is an option to ease the pressure through the crisis, but knowing where to start can be tricky if you’ve never asked for help before.
If you’re thinking of taking out a loan, it’s worth knowing a few top tips first. We’ve outlined everything you should consider when deciding if taking out a personal loan is a suitable option to help you.
The most important questions to ask yourself before applying for a loan
Sometimes, taking out a loan can feel like the easiest option to make debt and daily expenses more manageable. However, it’s important to think carefully and ask yourself the following questions before committing to it:
1. Why do I need a loan?
Firstly, you should think about why you need to get a loan in the first place. Taking out a loan is almost always a formal credit agreement, so it’s not a decision that you should take lightly.
Is the loan for an essential purchase, or are you just panicking before taking the time to seriously evaluate and organise your personal finances? Perhaps you’ve realised that taking out a debt consolidation loan could improve your situation over time, or maybe you’re looking for emergency expenses for something that’s happened to your family.
Whatever the reason, make sure you genuinely need to take out a loan. There are other means to access emergency funds, so you should explore those too and not rush into any decisions.
2. Do I have a good credit score?
If you’ve decided to go ahead and apply for a loan, you’ll need to think about your credit score as a priority. In fact, this is something that could determine whether your application is successful or not, so it could be a vital first step.
You can check this through credit referencing agencies, or your bank might be able to help you view your credit score. Always ask a trusted friend or family member to explain how it works if you’re unsure.
Go ahead and choose the most suitable (and affordable) loan for your situation if you’re confident about your credit score. Otherwise, it’s still possible to access finance with a poor or compromised credit score. You might just face higher repayments or stricter terms.
3. Can I afford to pay a loan back?
Repayment affordability is a critical consideration for anyone thinking of taking out a loan. Before you sign the credit agreement, the expected monthly repayments will be set out in a written schedule.
You should use your monthly income, any existing debt obligations, and typical budget to decide whether you’ll be able to afford this loan. If you’re unable to meet monthly repayments, this will negatively affect your credit score and you could end up in an even worse situation financially.
4. How will interest rates affect my loan?
Higher interest rates mean higher monthly repayments.
You’ll almost always end up paying the lender more than the amount that you intended to borrow – that’s just how they make money. But it’s important not to commit to a loan with excessively high-interest rates, as this could make your loan simply unaffordable.
If interest rates rise, it will be more expensive for you to borrow money. You could look out for loans with fixed interest rates, but bear in mind that if national rates fall, you’ll be locked into the same price.
Applying for a loan is not a decision that should be rushed. If you’re struggling to cope with existing financial troubles and you can’t turn to anyone for help, make sure you seek professional advice on ways to find help with debt.