5 questions to ask yourself before taking out a loan

16 April2021

Many people find that taking out a personal loan provides an ideal way of giving their cash flow a healthy injection - to cover costs their income otherwise can't quite stretch to.

However, like any financial commitment, borrowing money with a loan comes with some serious responsibility, as you'll have to commit to making regular payments until the loan is paid off in full.

With this is mind, let's take a look at five questions you should ask yourself before taking out a loan.

1. Do I really need to make this purchase right now?

Sometimes the things that we feel we want right now turn out to be not quite so important further down the line. If you're considering taking out a loan for something of an 'impulse' buy - a brand new TV, for example, or the latest gadget - it could certainly be worth giving it some serious thought first.

After all, if it's not an essential expense, it's likely that holding off and saving up the money yourself to cover the cost will make more financial sense - and won't affect your financial security. You may even find that, as the old saying goes, good things come to those who wait.

Click here to find out more about budgeting.

2. Is there a more affordable alternative?

In some cases, you can scale back the cost of what you want to buy by getting a less expensive alternative instead, which means you might not need a loan in the first place.

For example, if you're looking to upgrade the family car, rather than looking for a brand new motor, why not try looking at second hand, and see if you could find an equally good model that meets all your needs - but at a fraction of the cost?

You can read 5 of our top money-saving tips here.

3. Can I afford to make the payments?

Before you commit to any kind of loan, you must be confident that you can make regular monthly payments towards the loan until you've repaid it in full.

This means that you'll need a regular, stable income and an overall steady financial situation, so you can afford to cover all your essential monthly outgoings (rent/mortgage, food, bills, etc.) along with your loan repayments.

Use our loan calculator to find out how much your monthly payments could be.

4. How quickly can I repay the loan?

Another important question is how fast it's realistic for you to repay the loan. It could be the case that you're sticking to a tight budget and want to take some pressure off your monthly finances.

If this is the case, making smaller monthly payments over a longer period could be suitable - although this could end up costing you more overall due to interest.

On the other hand, you may feel financially secure enough to make larger monthly payments, which could see you become loan-free faster.

If you think a loan is suitable for you, you can get a quote for one here.

5. What will happen if I can't pay the loan off?

Looking at the long term, it's important to consider what would happen if you can't afford to repay the loan further down the line.

Fees & charges for non-repayment, damage to your credit rating and CCJs (County Court Judgments) are just some of the consequences you could face for falling behind on loan repayments.

Furthermore, if your loan is secured against your home, you could risk having your property repossessed if you can no longer afford your repayments.

If you're having problems paying off a loan, we could help you find a suitable solution.

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