Applying for a loan is a big decision particularly in times of financial uncertainty. There can be a lot of associated jargon and small print to sift through and sometimes it’s difficult to know whether a loan is right for you.
In this short guide, we improve awareness and help our members make good financial decisions which will protect their long-term financial wellbeing.
Before taking out a loan no matter your financial situation, it is worth doing some preparation to become a wiser borrower.
1. Do I really need to borrow?
Before you borrow money, you need to think very carefully about why you need to sign up for a loan or credit card. Ask yourself:
- Do you need to spend this money now?
- Could you do without this purchase?
- Could you save first and then make the purchase in full?
- Could you get partial funding by a smaller loan?
Answering these questions reveals options you may have not considered, helping you do what’s best for your financial health.
2. Can I afford to borrow?
Anyone considering taking out a loan needs to be upfront about whether or not they can truly afford it. Look at the repayment period. Can you comfortably afford to meet your payments for that length of time? Also, look at your household budget. Will the cost of borrowing exceed your budget?
3. Do I know my Credit Score?
Check your eligibility for a loan by finding out your credit score. Your credit score is given in your credit report, which is easy to obtain. GMBCU members can access their credit report here.
Your credit report contains a record of your credit history and helps lenders work out if you are eligible for a loan or credit. If you have repaid your past debts or loans on time and in full, then your credit score is likely to be higher.
However, if you have missed loan repayments, have County Court Judgements (CCJs) or there are indications that you have struggled to manage your finances, then your credit score could be lower. In which case, you’re likely to pay more for credit.
4. What type of borrowing should I apply for?
There are many different types of borrowing broadly split between unsecured and secured loans. A secured loan always has a specific asset as security. For example, a mortgage is the most common type of secured loan and is granted on the security of your house. You risk repossession of the house if you fail to repay the loan.
Personal loans, credit cards, payday loans and consolidation loans are examples of unsecured loans. While there are no assets for lenders to acquire with unsecured loans, if you default, debt collection agencies or the courts for lenders will recover outstanding payments.
Knowing why and how much you wish to borrow and the length of repayment you can afford will guide you to certain lending products.
Tip: most people can budget better with an unsecured personal loan as it provides fixed repayments over a fixed period.
5. How do I compare loan offers?
When comparing loans, you should do a like for like comparison of these three key areas:
1. The APR (Annual Percentage Rate) is designed to show the overall cost of credit, not just interest but also the impact of any associated fees. The APR is often called a representative APR so beware as this tends to be a headline rate which most applicants will not qualify for (read our blog to understand why). So, compare APRs but have enough flexibility in your budget to accommodate potentially higher repayments.
2. The loan term and monthly or weekly repayment amounts. Longer terms usually means lower repayments however the longer you spread repayments the more interest you pay. So, go for the shortest repayment period you can budget for and directly compare the total interest paid on each loan offer.
3. Associated charges or penalties such as early repayment fees or charges for late loan repayments should also be considered.
6. Understand what’s at risk
As part of your groundwork, you should also consider the worst-case scenario as it is an important part of any loan decision-making process.
If you find yourself in a position where you can’t afford your loan repayments, you could end up with debt which will adversely impact your credit rating. This can negatively impact your ability to get credit in the future and perhaps even prevent you from completing a telephone contract or applying for certain jobs.
Most lenders will assume you made a considered application. If you meet their lending criteria, you will most likely get the loan. Lenders won’t necessarily quiz you on how stable your job is or how much emergency savings you have. Which is why you must check your own financial health before taking out a loan.
However, don’t despair. There are responsible lenders genuinely interested in supporting your long-term financial health.
Personal loans tailored to your needs
GMB Credit Union offers affordable, fair, and flexible loans to help our members survive difficult times and achieve their personal goals.
Unlike most lenders, we are not driven by profit. Instead, we are focused on our member’s financial wellbeing. Helping you save money on borrowing is one of our top priorities. We want our members to make the most of their hard-earned money and become wise borrowers by educating themselves.