If you’ve never taken out a loan before, it can be a scary process. There can be so many checks and balances performed on your financial health and prospects that you can really feel like you’re under the microscope. However, a loan from a reputable provider could be just what you need in order to set your financial health straight and get yourself back on track.
Loans aren’t for everyone, though, and there are lots of things you should know before you embark on this particular journey. We’ve assembled a guide to help you navigate the tricky and often confusing world of loans, and to help you make sense of it all. Without further ado, let’s get started. Here are some of the things we think you’ll need to know before you think about taking out a loan.
There are several different types of loan
When you go to apply for a loan, it’s not as simple as just “applying for a loan”. You’ll first need to know what kind of loan you want, and that will vary depending on how much you need and over what period you want to pay it back. Here’s a quick and dirty guide to some of the more basic types of loan out there.
Secured vs unsecured
There are, broadly speaking, two types of personal loan: secured and unsecured. A secured loan is, as you might expect, secured against something you own, usually a piece of property. An unsecured personal loan, meanwhile, isn’t secured against anything concrete, so it’s just a case of borrowing money and paying it back at the provider’s rate. Unsecured is usually better because there’s no chance of losing something tangible if you don’t pay back.
If you take out a guarantor loan, you’ll be expected to find someone who can vouch for you and act as your guarantor if you can’t make repayments. This is usually someone of good standing within the community, but it can actually be anyone, including family members, spouses, and even friends. However, your guarantor will need to be financially solvent and have a solid credit history, so if you’re thinking of someone who has a poor credit score, they may unfortunately be the wrong choice.
As the name suggests, peer-to-peer loans connect individuals who want to lend money with those who need to borrow it. They cut out the middleman by not involving banks or bigger financial institutions, but they also come with risks of their own; they sometimes don’t offer the same level of protection or scrutiny that standard loans do. However, if you pick the right peer-to-peer platform, this could be the right option for you, especially if you don’t have a great credit history.
Loans are good in some situations and bad in others
It’s important to fully understand your financial situation before you progress with a loan application. Here, we’ll outline some situations in which taking out a loan might be a good idea, and some in which you might want to reconsider. First, let’s take a look at when you might want to apply for a loan.
When you need to consolidate debt
If you’ve got debt sprawling from lots of different sources and you want to pay it all off in one fell swoop, a loan can help you do that. You’ll still need to make repayments on the loan, but now you’re just paying into one account instead of several.
When you need money to tide you over
If it’s a few days before payday and you just can’t quite stretch to making the bills, a loan can help you in this situation. It’s important to note that this should only be used on a short-term basis; any long-term financial problems likely won’t be solved by a loan.
When you need a big cash injection
Some life events are just too expensive to dip into savings for, especially if you’re paying for them all at once. Weddings, funerals, house sales, and other occasions are good candidates for loans, because you may not have the cash to pay for these expensive but necessary events.
There are also situations in which taking out a loan isn’t a good idea. If you find yourself in any of these situations, make sure that you think carefully before applying, as you could end up in greater debt as a result of taking out a loan.
When you’re in long-term financial trouble
If your financial situation is untenable and you’re struggling to pay debts, a loan isn’t a good idea. This is because adding another repayment obligation to your list will just increase your stress. The short-term cash injection will feel good, but you’re just exacerbating your long-term financial woes.
When you want to invest
While there are crucial differences between investment and gambling, the fact remains that an inexperienced investor is effectively simply betting on which investments will pay dividends and which won’t. If you want to invest money, it’s best to seek professional advice and use cash you know you won’t miss rather than starting up a new loan.
When you need to place a mortgage deposit
Using a loan for a mortgage deposit is a huge no-no. Your bank or building society will likely ask where the deposit has come from, and if they discover it’s a loan, your mortgage application stands a good chance of being denied. It’s important to ensure that in this situation, you use your own money to place the deposit.
These are just some of the things we think you need to know before you take out a loan. Did we miss anything? What pearls of wisdom do you want to impart to potential loan applicants?