The word “loan” can be scary – but it doesn’t have to be. Essentially, a loan is similar to an overdraft, a mortgage or a credit card: it’s a way for you to borrow money from a bank to pay for the things you need, which you then repay with interest at agreed intervals.
Too many people, however, take out loans without adequately considering the consequences on their financial well-being. So if you’re in the process of considering a loan, make sure you look at all the factors before signing the dotted line.
Deciding to borrow money
The first thing you need to consider is what you need the money for – and whether you really need to spend it. For example, it’s not a good idea to take out a loan if you simply want more disposable income – it’s more sensible in this case to curb your current level of spending and live within your means. Some people decide they need a loan to pay for a luxury holiday or perhaps to pay for a wedding. Many experts will advise against loans for these kinds of purchases and advocate saving instead. For instance, this blog post from Ian Bright, a senior economist at ING, offers a sensible and thought-provoking take on whether it’s prudent to take out a loan for a holiday.
However, there are some instances where a loan may be the only way you can pay for something that you really need. Perhaps it’s essential that you need a new car and you’re only able to pay for it with a loan, or you need to make some urgent household repairs. Scour the market carefully before making a decision, as interest rates can vary widely and this can significantly affect the amount you will pay back over time.
Some individuals take out a loan if they – or a child, or grandchild – need money to fund a higher education course that will benefit their long-term career prospects. It’s important to consider your options in this instance and not go straight to your bank. Local authorities and some charities may offer low-interest or interest-free loans for higher education, particularly if you’re an adult re-training or entering education for the first time. The Money Advice Service offers more information about further education loans in England.
Living with loan repayments
Before you borrow money, you need to have a plan that deals with your loan repayments. Loan repayment periods can vary from a few months to several years, depending on the amount of money you borrow. Typically, shorter repayment periods mean you’ll pay less interest in the long-term. So it’s important that you establish a repayment timeframe that’s not too long, but is also realistic for you.
In order to incorporate these repayments into your current budget, you’ll probably have to cut back on other household expenses. So before committing to a loan, take time to consider if this is a change you’re willing to make. If you’ve already taken out a loan and you’re struggling to repay it, there are still steps you can take to address the problem. The Money Advice Service, for instance, offers a range of advice on reducing the cost of personal loans, and reputable debt advice helplines like the National Debtline can be a lifesaver in hard times.
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