Our 6 Golden Rules of Getting a Loan
How to get a loan safely.
Updated on Thursday 2 July 2020
There are many circumstances under which you may want to opt for a personal loan, including debt consolidation, making large purchases (like getting a new kitchen or booking a wedding) or to cover an emergency financial situation.
There are always risks involved when taking out a loan, but you will increase your chances of getting a loan safely if you follow our six golden rules.
1. Plan repayments before applying for a loan
With a personal loan, you are essentially borrowing money to pay for goods or services and then paying it back over a pre-arranged time period, often with additional interest added.
Most loans are best suited to people who want to make large, one-off and planned purchases that are within their budget.
In order to use a loan safely, you must plan ahead and work out how much you will need to pay back, when you will be able to do so and whether or not you can afford the expense.
Without a plan in place, you are putting yourself at risk of falling further into debt if you’re unable to make repayments on time, which can lead to all sorts of financial difficulties.
You should prepare a budget beforehand and ask yourself the following questions:
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Will you be able to repay this loan comfortably?
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When will you be able to repay it by?
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Is a loan the best option for you?
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Could you dip into your savings to reduce the amount you will be borrowing (and paying interest on)?
If you decide that the best option for you is to borrow using a personal loan, then you must assess its impact on your future finances.
Note that if you fail to repay an unsecured personal loan on time, your credit score will be damaged and you may struggle to get credit in the future, whether it’s a credit card, loan, mortgage or even a mobile phone contract.
If you have a secured personal loan then the risks are higher as you could have your home repossessed for failing to make payments. Always make sure you fully understand your lender’s terms and conditions, and what’s expected of you in terms of repayments.
2. Check your credit score and improve it beforehand
Always check your credit score before applying for a loan and improve it if needs be.
Your credit score impacts what personal loan deals you are eligible for, as those with a better credit score will generally be offered better deals from lenders because they are considered more reliable due to their credit history.
Read more: How to Improve Your Credit Score
Some lenders will offer you a loan if you have bad credit, but it is likely to come with a higher interest rate, and other lenders may reject your application entirely. If you apply for a loan with a poor credit rating, there is a chance that you will be refused a loan, which in-turn damages your credit report further and makes it more difficult to borrow in the future.
Your credit score will also be damaged if you are unable to repay your loan on time, which could impact your chances of getting a better mortgage rate, credit card or loan deal in the future.
For these reasons, it’s important to check your credit score regularly and keep it as healthy as possible. You can check your credit report today with Check My File – a multi-agency credit reporting website.
3. Weigh-up your options and consider a credit card
It’s worth noting that you have many different options when looking to take out credit, and a loan is just one method. They are beneficial in that they usually offer fixed monthly payments and you know how much you will need to repay each month, but there are cheaper ways to borrow that might suit your needs.
Take credit cards, for example. There are many credit cards out there with 0% deals, meaning that you will pay no interest on your balance if you pay it off within the interest-free time period. This is far cheaper than getting a personal loan, which has an average interest rate of 9.41% in the UK according to Experian.
Loans may not suit you if you don’t have the discipline or financial capacity to make the repayments within this interest-free period.
Credit cards can also be used as great tools to build your credit score for future credit applications, so they’re certainly worth considering.
Read more: How to Build Your Credit Score with a Credit Card
4. Consider that consolidating your loans may not always be the best choice
Consolidating your loans essentially means taking out a new loan to pay off other debts (loans or credit cards), combining everything you owe into one single, larger loan. People do this as it is often easier to have all of your debts in one place, meaning that you only need to make one monthly payment, but there are several risks to consider when doing so.
Unlike personal loans, these consolidation loans can be secured, meaning that you could lose your home if you cannot afford to make repayments.
It isn’t always the cheapest option either, as having debt in a few different places may be more difficult to manage but it can work out more affordable. It’s certainly worth exploring your options, rather than assuming it will be cheaper to get a consolidation loan.
5. Remember that borrowing over a shorter term is usually cheaper
If the interest is the same, borrowing over a shorter timescale will lead to higher monthly costs, but it could be cheaper in the long-run.
Borrow as little as possible, for as short a time as possible, with the lowest interest rate on offer.
You do, of course, need to be able to afford the monthly repayments, so if the monthly repayments are beyond what you can afford, then you will need to stretch the loan out over a longer period. This could, however, leave you more out-of-pocket overall.
Read more: How to Cut the Cost of Loans
6. Always make repayments on time
If there was one ultimate golden rule to abide by, it would be to ensure that you always make repayments on time.
If you don’t do so, your debt could spiral out of control, your creditworthiness will be damaged, and you could end up in a far worse financial position than you were in beforehand.
Loans can be great tools, but they don’t come without their risks, so be careful if you ever decide to commit to taking one out.
Free personal finance advice at Compare UK Quotes
Here at Compare UK Quotes, we provide advice on all-things personal finance and insurance.
Before taking out a loan, be sure to read our full guide to personal loans and seek free advice from Citizens Advice or debt charity Step Change if you require further professional help.
Loans are a form of debt and they can be dangerous if you don’t know exactly what you’re doing. With our six golden tips for taking out a loan, you should now be better equipped to make an informed decision on whether or not loans are the right option for you.
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