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3 steps to choose the right loan for you

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Choosing a loan may seem simple at first but there are many things to consider. It’s not just the loan’s value, it’s also how much you will have to pay back in interest and the repayment terms. Without careful consideration, you could make the wrong decision and end up paying back more than you need to, or for longer than you might want to pay it back. Fast guarantor loans are there to make life easy but you should never go with the first offer presented to you. Shop around and follow these three simple steps.

Why it’s important to be careful when choosing a loan

Without careful consideration, you could experience any or all the following:

  • Paying back more than you need to pay back because the interest is high compared to other loans or alternative financial products
  • Experience financial penalties when you try to pay your loan off early. Some loans allow this, but others do not
  • Damaging your credit rating or trust score by not sticking to the terms of the agreement – even when trying to pay off early, you could experience negative effects
  • Agreeing to a condition that you are unable to fulfil later such as a much larger final payment

What steps should you follow to avoid these potential scenarios?

Step 1: Consider the purpose of the loan

Every loan you consider will offer attractive rates and perks. As attractive as they are, it’s essential to ignore the advertising and consider whether that product will benefit you and the purpose for which you need the loan. There may be better loans tailored for your specific or targeted for certain purposes (motor vehicles, home renovation etc). These could have lower interest rates and a faster/easier application process because it’s tailored for that purpose.

Also consider the final value you wish to borrow. It’s sometimes tempting to apply for a higher amount because the interest rate to pay back is lower. You will still need to pay back that interest. It’s best to only borrow what you need as you may end up wasting the rest.

Similarly, don’t be tempted to go in low. The reason you took out the loan at all was for a financial investment. If you do not have the savings to cover it, cutting back to save a few pounds in interest may do more harm than good to your long-term finances and your anxiety.

Lenders always ask the purpose of the loan. This is part of a due diligence test to check there is a viable purpose for it. Accordingly, they may offer an adjusted amount if they feel it is unreasonable.

Step 2: Compare interest rates, interest type, and other costs

When considering your loan options, pay attention to the interest rates each product charges. Use a calculator to work out how much you will be required to pay back. This can also help you understand how much you might save if you pay it back over a shorter period. The APR – annual percentage rate – is the amount of interest you will pay back each year.

Is it a variable or flat interest rate? Most loan products are flat rate but you will find some variable, it’s not just limited to mortgages. There are pros and cons to the flat and variable rates. In a time where interest rates are relatively stable, it makes sense to go with a flat rate. You can get some good deals when the interest rate is variable, but you could also see massive fluctuations in repayments and anxiety about your changing financial commitments.

Finally, you should look through the small print for any hidden or extra charges. The most common is early settlement penalty. Customers try to clear a debt early so they no longer need to worry about it, or they believe they can reduce the amount of interest left on the loan. However, some lenders insist on full settlement including interest or even a penalty for early settlement.

Step 3: Use eligibility checks

Applicants prefer to know whether they are eligible for a loan before applying. It saves embarrassment of rejection and the frustration of having to go elsewhere. Fortunately, you can check your eligibility for free. There are two ways of doing this.

  • You can request a full credit check score for yourself and you do not need to pay for the service. There is one downside to the full report. Each full check will affect your credit score and should be used sparingly
  • Eligibility checks – also known as a “soft credit check”. These check far less data for eligibility will give you a quick response. They do not affect your credit score so you can do it as often as you like with as many providers as you need

A low credit score will not necessarily mean that you won’t get credit. It merely limits the available options. There are specialist loans available to people with poor or low credit score so when you recommence your search, you should limit the search to those products.

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