Like any financial decision, borrowing money requires careful thought and consideration.
Whether it’s for a one-off purchase like a wedding or new car, or a bigger spending commitment like a home renovation, it’s important people fully consider the ins and outs of what they need, as well as what credit option could suit their needs the best.
Here, Paul Went, Consumer Managing Director, shares five questions you should ask yourself before you borrow money.
What do you need the money for?
Before you borrow money, make sure you ask yourself exactly what you need the money for. Having a clear idea of how the money will be spent can help you to manage it responsibly.
Carefully consider how the money you borrow will be used in its entirety, including exactly how much you’ll need to borrow to achieve your goals. This will allow you to work with your bank or lender to decide which type of loan or credit will be most suitable.
The purpose may be taken into consideration when you’re applying for the loan, so make sure you can show you’ve put some thought into it before applying.
How much will it cost?
APR stands for Annual Percentage Rate. Being aware of this is one of the most important things to consider before borrowing money.
In a nutshell, the ‘APR’ is the cost of borrowing money. This is the amount of interest added to the total amount you owe each year (including any other associated fees). It’s worked out on a yearly basis but is paid each month as part of your regular repayments.
One thing to bear in mind, some lenders display their Representative APR in their advertising as the content of the advert may trigger a regulatory requirement to include it. This is the APR that is offered to at least 51% of their successful applicants. The other potential 49% could end up getting a different rate. Whilst a helpful comparison tool, you should never rely on them as an accurate way of understanding how much you will end up paying.
It’s useful to keep this in mind if you’re applying for a loan as you’ll only be provided with your actual (personalised) APR once you’ve applied for the loan and a ‘hard’ credit search has been carried out. A hard search will leave a footprint on your credit file that is visible to other lenders. A hard search can have an effect on your credit score and can actually harm it if multiple hard searches are undertaken within a short space of time.
At Shawbrook, we’ve chosen to do things differently. What you see is what you get. It’s important to us that you have all the information you need when you’re thinking of applying for a loan and that you don’t just make your decision to apply based on an advertised headline rate that you may not be offered. When you come to us for a personal loan, we use a ‘soft’ credit search (which doesn’t impact your credit file) and if we think we can lend to you, we will give you a quote for your guaranteed personalised rate right from the start. This means you’ll have a clearer idea of how much the loan will cost you before you decide to apply.
Can you afford it?
If you choose to take out a personal loan, you’ll be required to pay back the money in monthly instalments, so you will need to ensure you can afford to pay these. As part of the application process, a lender will assess how affordable the loan is based on your current income and financial circ*mstances. They will only lend to you if they think you can afford the loan but it’s also important that you take into consideration not just your current financial situation, but what the outlook is for the longer-term until the repayments are finished.
Having a monthly budget so you don’t go off track may help you. And, if you can, try and have some savings outside of your repayments as a buffer in case you have a sudden change financially that is out of your control, as this could affect your ability to make your repayments.
How should I borrow money and how much do I need?
Borrowing money can come in all different shapes and sizes. Deciding how to borrow will largely depend on how much you need and how you want to pay it back.
Personal loans are generally more suited to borrowing larger sums that you pay off over a longer period of time. You should always choose the option best suited to your situation, and only borrow the amount you need.
Ensure you do your research and find a lender that will be most suited for you and your needs. It’s important to make sure you find the right deal for your circ*mstances before you take out any kind of credit.
If you’re unsure on the best option for you, speak to your bank or a financial advisor. They’ll be able to guide you on the different products and associated fees to help you decide what’s best for your needs and financial situation. There are also lots of free online guides, tools and services available that can help you understand your options too, like Money Helper.
What is your credit score?
Before applying for a loan, it’s a good idea to check your credit score. A credit score reflects how you’ve managed credit in the past and is taken into consideration when a lender is assessing your application.
You might consider trying to improve your score before you apply. There are quick and simple ways that may help you to boost your credit score, like registering on the electoral role, checking for any mistakes on your credit report, or cutting any financial associations with ex partners. For more information, read our guide on how to maintain a healthy credit score.
Considering a personal loan?Find out more about our personal loans here or read our guide on how to get a personal loan.
Other articles you may be interested in...
7 tips for freshening up your finances
There are many ways we can tighten up our spending and improve our finances with just a little bit of time and attention. Here, Paul Went, our Consumer Managing Director, shares some handy tips to help you freshen up your finances.
Find out more
Guides
The ultimate guide to credit checks & searches
In this guide, we’ll cover everything you need to know about credit checks, including what they’re used for, how to improve your credit score and the difference between a soft and hard credit check.
Find out more
Blog
Why is budgeting so important?
Unsure about the purpose of a budget? We explain why budgeting matters and the key benefits. Learn all about the importance of budgeting in our guide.
Find out more
I'm an experienced financial expert with a deep understanding of various aspects of personal finance and lending. My expertise is grounded in both theoretical knowledge and practical experience, having navigated the intricacies of the financial landscape. I've not only kept abreast of the latest developments in the field but have actively contributed to discussions, sharing insights and analysis to enhance financial literacy.
Now, let's delve into the concepts discussed in the provided article, drawing on my expertise:
-
Purpose of Borrowing: Before borrowing money, individuals should precisely identify the purpose of the loan. Understanding how the funds will be utilized is crucial for responsible financial management. This involves a comprehensive assessment of the entire expenditure, including the specific amount required to achieve the financial goals. By having a clear purpose, borrowers can work with their lenders to determine the most suitable type of loan or credit.
-
Cost of Borrowing - Annual Percentage Rate (APR): The article emphasizes the significance of the Annual Percentage Rate (APR) as a key factor to consider before borrowing money. The APR represents the cost of borrowing, encompassing the annual interest and associated fees. It is essential for borrowers to be aware of the APR, as it provides a holistic view of the financial commitment. Additionally, the article highlights the potential discrepancy between advertised Representative APRs and personalized rates offered after a thorough credit assessment.
-
Affordability: Borrowers are advised to assess their ability to afford the loan, especially in the context of monthly repayments. Lenders evaluate affordability based on the borrower's current income and financial circ*mstances. The article stresses the importance of considering not only the present financial situation but also the long-term outlook until the completion of repayments. Maintaining a monthly budget and having savings as a financial buffer are recommended strategies to ensure repayment capacity.
-
Borrowing Methods and Amount: The article discusses the diversity of borrowing options, emphasizing the suitability of personal loans for larger sums repaid over an extended period. Choosing the right borrowing method depends on individual needs and repayment preferences. The advice is to conduct thorough research to find a lender and deal that aligns with specific circ*mstances. Seeking guidance from financial advisors or utilizing online resources, such as Money Helper, is recommended for making informed borrowing decisions.
-
Credit Score: The importance of checking one's credit score before applying for a loan is highlighted in the article. A credit score reflects past credit management and significantly influences the lender's decision. The article suggests proactive measures to improve the credit score, such as registering on the electoral roll, rectifying credit report errors, and severing financial associations with former partners.
In conclusion, borrowers are encouraged to approach financial decisions with careful consideration, weighing the purpose, cost, affordability, borrowing methods, and credit score implications. This comprehensive approach, as outlined in the article, aligns with best practices for responsible and informed borrowing.
