Can You Afford a Personal Loan? Four Questions to Ask Yourself Before Applying
Whether you need money for home improvements, to consolidate multiple debts or to help pay off a wedding, there are many reasons why people take out a loan. However, it shouldn’t be a quick decision, and there’s much to take into consideration before applying.
Here at Asda Money, we want to help you make the right decision, so we’ve put together four questions you should ask yourself to make sure you’re making the best choice for you.
Will I be accepted for a loan?
When applying for a loan, it’s a great idea to check your credit rating beforehand to see if you’ll be eligible. Your credit score is affected by a number of factors, but it’s essentially an evaluation of your credit worthiness. It gives lenders the chance to see your entire credit history giving them an understanding of how you manage your finances and how likely you are to pay back a loan.
Some common reasons you might have been refused a personal loan are:
- Unpaid credit cards or store cards
- Unpaid or late repayments of loans
- Applying for a number of loans in a small space of time
How much can I realistically borrow?
The amount you’ll be offered will depend on your individual circumstances, in particular your credit rating, but be sure to only accept what you need. It can be tempting to ask for more money than you actually need when applying for a loan, however, this will mean you’ll have more to pay back in the long run.
If you’re unsure of how much you can afford, a loan payment calculator can help you work this out. Most banks and financial companies will have free loan calculators online, so you can see how much you can comfortably borrow. However, one thing to remember is that no matter how big or small the loan, it’s likely that you’ll be making repayments for quite a long time, so you should take into consideration any changes to your circumstances coming up in the future.
Am I good at budgeting?
If you’re getting a loan for the first time, you have to ask yourself whether you’re good at budgeting. If not, don’t worry, as there are plenty of ways you can get better! Start off by looking at all your monthly incomings and outgoings, no matter how big or small. Many people choose to create a spreadsheet each month, where they can input everything that they spend on a daily basis, such as rent, bills, food shopping, phone contracts and more. This will show you in black and white what you’re spending your money on, giving you the opportunity to see what you can cut back on.
Another fantastic way to budget better is to make your savings automatic. If you tell yourself you’re going to try and save a certain amount each month, you may be more tempted to spend it if it stays in your bank account. If this sounds like you, then a great way to overcome this is to create standing orders that automatically go into a separate bank account as soon as you’ve been paid.
What type of loan should I get?
The type of loan you choose will depend on how much money you need to borrow. One of the most common types is a personal loan, also known as an unsecured loan. This type of credit is suited to people wanting to borrow money and pay back a fixed amount each month, without having to put any belongings at risk.
If you want to borrow a higher amount, generally £25,000 and over then it’s likely that you’ll have to opt for a secured loan. Unlike an unsecured loan, this type of loan means that you’ll have to secure an asset, such as your house, as collateral. If you fail to make repayments, your house will be at risk of repossession, so you should only get a secured loan if you’re 100% confident that you can repay it in full.
For those who already have a range of repayments each month, such as credit cards, loans or overdrafts, another option is a debt consolidation loan. This type of loan blends all of your loan repayments into one easier-to-manage monthly repayment, making it much simpler to keep track of what’s leaving your account.