Many of our buying decisions in 2019 are dominated by the use of a simple Google search.
If he shows up first and seems to have what we need, then why go anywhere else?
But not all products are created equal, and this is never more true when it comes to financial products, especially loans.
There is no loan that is inherently “good” or “bad,” more than there are that will be more suited to your situation than others.
You might hear a lot about “high cost short term loans” or “payday loans” as a bad option, and sometimes they are, but not always.
Essentially, you should always check if a loan is right for you using the following factors:
MSE money mantra
Before you “buy” anything (and remember that a loan is a product you buy, not “free money”), this MoneySavingExpert money mantra is really a godsend.
If you are skinny, you might ask yourself:
- Do i need it?
- Can I afford it?
If you are not skinny, you ask?
- Will I use it?
- Is it worth it?
You could get a loan for a number of reasons.
Perhaps it is because you are running out of money for your living expenses. But do you really need a loan, or is there money in savings that could be borrowed from family or friends for less?
If it’s for a product like a car or home renovations, do you really want to take out a loan, or could you buy something cheaper or make improvements over time?
There will be times when the answer is yes to these questions, but it is important to make sure that you are making the right decision in taking out any form of credit before doing so.
Good and bad debt
We have already spoken of “good” and “bad debt” – especially with regard to mortgages.
While all debt is technically debt, some are considered better than others if they increase your overall wealth.
Will the loan, like a mortgage or a student loan, actually make you money in the long run? Or, like the depreciation of a car once it leaves the forecourt, will it cost you money in the long run.
This doesn’t mean that you should never take on debt that won’t directly make you richer. For example, while that car will be worth less when your repayments are over, it may be essential that you put yourself out to work every day or take your kids to school.
But that puts things in perspective when it comes to whether your loan is right for you. Could you, instead of financing a new car, go for a used model that will cost you less and help balance the books better?
One of the main things to consider when taking out a loan is interest. This is the supplement that you will repay as a kind of “cost of borrowing”.
Typically, when it comes to a loan, you’ll see this written as APR, which means an annual percentage rate.
So if you borrowed £ 1,000 in a year with an APR of 10%, you’ll pay back £ 1,100 in total (which includes the principal cost of the loan and the additional interest they charge).
It can get trickier when it comes to shorter term loans, which is why you might see higher APRs on payday loans. They are still an expensive way to borrow, but if the APR is 1000% you won’t necessarily pay back 1000 times what you borrowed because you could pay off the full amount within 30 days.
In general, the lower the interest rate, the better. But, it should be factored into the time it takes to pay it back and valued as the overall cost of the loan rather than as a stand-alone figure.
As mentioned, take a look at how long you will be repaying the loan. Some may need the money immediately but be able to pay it back sooner, so for them it won’t make sense to pay it back over several years.
Others are looking to share the cost of a large purchase, in which case small refunds over time are the ideal solution.
This is absolutely how the repayment time affects the cost of the loan, but also whether it is right for your needs and budget / income.
Penalties for early repayment
Some loan companies will have penalties in place for prepayment.
This can be bad for people who make money later and want to close the account, or for those who prefer a little flexibility.
Check the terms and conditions of the loan beforehand to see if this is the case.
A loan can have a low interest rate and be as flexible as you want, but if you are not the “right” customer for that lender, you will not be accepted.
Some companies will allow you to check if you are eligible before applying (this is normally a gentle research, which shouldn’t affect your credit rating), which can make things less intimidating.
Secure or insecure
An unsecured loan is a loan that is not subject to any collateral, for example a property. A collateral is, so if you don’t repay the money, the lender can seize your property as a form of payment.
Neither makes a loan good or bad, as there is always something at stake (including your credit rating and your 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 auto financing.
In contrast, unsecured loans might be preferable for people who do not have such assets – for example, those who rent and do not own valuables.
To increase your chances of eligibility by removing the risk, some lenders will ask for a guarantor.
This is someone who will co-sign your loan, committing to repay it if you don’t.
Although secured loans are billed as a low interest option for people who need a payday loan, it is not for everyone.
On the one hand, your guarantor may have to meet certain criteria, such as being a homeowner. There could also be personal ramifications if a family member or friend had to pay off a debt that you couldn’t.
Think carefully before asking someone to guarantee a loan and make sure they understand the process before signing on the dotted line.
Like any other product, loan companies also have online reviews.
Companies like Feefo compile reviews from real customers, asking them how they would rate the service they received. From there you can check and see if things are legitimate and if this is the right lender for you.
To determine a good loan, you have to look at a whole host of factors, but whether it is a good lender or not, it can only be discovered by how they have treated past customers.