While it isn’t a good idea to take on unnecessary consumer debt, there are times in most of our lives when we might need to take out a loan of some sort. There are many different ways to borrow, and there are a number of different elements that need to be considered.
For example, common types of borrowing include:
- General personal loans – usually the most straightforward type of loan.
- Mortgages – longer-term loans that can also be partly seen as an investment in property. More complicated than a simple personal loan, with arrangement fees, checks on the property, and so on.
- Career development loans – another loan that can be partly seen as an investment, taken out to enhance career prospects and possibly also future earning power.
- Payday loans – very short term loans with extremely high borrowing costs (it’s always a good idea to consider other alternatives to these, including credit unions).
- Car finance – this can be more complicated as car finance includes straightforward loans, but it can also include hire-purchase agreements (part loan and part rental where you own the car once the loan’s fully paid off), and finance that is essentially rental (where you have to give the car back at the end).
- Non-formal borrowing – borrowing from friends, family or unregulated sources.
Important things to look for when considering loans
- The APR (annual percentage rate). The amount of interest you’re expected to pay on top of the money you’re borrowing over the course of one year. Check the whole of the market to make sure it’s a competitive rate. Always consider the APR jointly with the next point.
- The length of the loan period. The longer the loan, the more total interest you will need to pay.
- Affordability. Can you afford the monthly repayments and any other associated costs?
- Additional fees and costs. This may include arrangement fees, brokerage fees, booking/application fees, valuation fees, other administrative fees, money transfer fees, compulsory/required insurance, legal fees, advice fees and more. Always read the small print!
- Are you getting the headline rate? If you apply for some loans, you may not be offered the advertised best APR. This is often related to what’s on your credit file, as lenders may consider you to be a greater lending risk depending upon your credit history.
- Possible penalties. For example, this could be flat fees or percentages charged for late payment, early repayment charges, or extra rates for mortgages with high loan to value ratios (i.e. a relatively small deposit on a relatively expensive property).
- What happens if you default on the payments? Make sure you know whether a loan is unsecured or secured on your property – you could lose your property.
- Other credit you’ve applied for. If you take out several applications for credit in short succession, this leaves a ‘footprint’ on your credit file.
- Sometimes you also need to consider whether the loan is for something that’s a good investment or not. For example, is property likely to increase in value over time? This can be the case when buying most houses or flats, but most types of cars tend to depreciate in value as they get older.
- Payment protection insurance. This is an option that can cover your repayments in the event of you losing your job or having other financial difficulties, but not everyone wants to purchase this along with their loan. It must be clearly stated and opted into, and never added to the total without your knowledge or agreement.