When you are thinking of borrowing money, then this is a question that you should always ask yourself. It is not just about which loan will suit you personally but also which will be the best for your circumstances. It is sensible to think about a number of things, so that you will choose the right type of loan. Then you can compare different loans of that type in order to make sure that you are not overpaying for it. So you need to start by thinking about a selection of things such as the examples below.
Purpose of Loan
Some loans are only suited to specific purposes. For example, if you are borrowing money to buy a house, then you would need a mortgage. However, if you are buying a car, then you could get a car loan, but a personal loan might be better, so it is not always completely obvious as to which would be best. Think about the amount that you need to borrow s well as some loan types will only lend you small amounts, such as a pay day loan and others will only lend you large amounts, such as a personal loan.
It is therefore wise to find out about all of the different loans that are available and think about which would suit your purpose the best. Some people might use a financial advisor for this and you could find that you bank will have one that you can chat to for free. However, you will need to bear in mind that they will try to sell your their loans, when they may not have the most competitive rates.
Cost of Loan
It is so important to make sure that you know the full cost of the loan. This is a great way to compare loans as you will know how much extra you will be paying for each one. The costs can vary quite dramatically too, so it can be a really significant factor. It is easy to think that the cost will not make that much difference, particularly when interest rates are low, but it can make a significant difference so is always worth calculating.
Of course the cheapest loan today may not be the cheapest in a few months’ time. Variable rates change and therefore cash loan lenders will become more and less competitive as they change their rates. It is hard to predict the future though and even looking back on past rates may not be enough to help you. Therefore the best you can do is to compare the current rates. You can also check that they are still competitive after a while and see whether you can change lenders.
Term and repayments
It is worth carefully thinking about the length of the loan and the repayment amount. Most typical loans will have a fixed repayment amount each month and will last for a certain amount of time. This will allow you to see how long you will have to make repayments for and how much they will be. You should be able to use this information to decide whether you feel you will be happy with this. Think about whether you can afford those repayments and whether you will be able to afford them for the full term of the loan.
If you have a loan with no repayment schedule then this can mean that you can choose how to pay back and when. This can mean that it is easier to manage but there is a risk that you will leave the loan outstanding for longer than necessary and end up paying more money than you otherwise would.
It is worth considering the risks of different types of loans. With a credit card, you can pay off the full balance, some of it or just a small amount. This means that it is up to us to be self-disciplined and pay back more of it so that we keep the loan costs lower.
Other loans have risks too though. We need to think about whether a variable rate or fixed rate might be best for us. A variable rate will change if rates go up and that will make the loan dearer but it may come down if rates fall and so will be cheaper. However, a fixed rate will not change, which will allow us to know exactly what we are repaying and it will not go up if rates increase but if rates go down we will still have to pay the higher amount.
All borrowing carries a risk though as we have to be sure that we will be able to afford to make the repayments. It can be hard to predict what might happen in the future but if we can check to make sure we can afford them now and know that there is little risk that our situation will change, that will help. Also comparing loans to find the right one and the best price will also be useful.