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How Do You Know Which Loan Is Suitable For You?

And while there are plenty of types of loans, there are also many providers, and every loan differs. 

Posted: 1st September 2022 by
Finance Monthly
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No two loans are the same, and different loans will be suitable for different people. 

You may want a mortgage, a student loan, an auto loan, or an emergency loan, or perhaps you just need a good old personal loan. Whatever the case, even two of the same type of loan can have stark differences.

Personal loans are the most common type of loan to be taken out, so using them as a guideline, today we will look at how you can know which loan is ideal for you. 

We do not mean, what are the types of loans, here we are talking about how you can tell if a loan offer is the right one for you. 

Things To Consider When You Are Evaluating A Loan Offer

There are endless options for loans out there, but you should be careful not to take the first offer you get. It might seem fantastic when you first look at it, but there is something to be said about shopping around. 

When you are evaluating a loan, there are 5 key factors you should be taking into consideration.

How Much Is The Loan?

Firstly you should think about how much the loan is. Consider how much you need the loan to be, and if you can afford a loan of this amount. You need to be able to state and describe the purpose of your loan. 

What is it for, how do you plan to use the money, and is this a reasonable goal for you? 

Every loan will have limits however, these are restrictions due to your income, any collateral value, your credit, and so on. This means you can’t be on a salary of $40,000 per annum and expect to get a loan of $900,000. 

You need to seek out a loan that you can reasonably repay. If you are offered a loan, and you can afford it, but it does not cover every need, consider giving a lower amount a try. Test the waters with it, if you will.

Type of Loan

Once you know how much you will need from your loan, you need to have an idea of what kind of loan is the most sensible choice for your situation. Personal loans are ideal for many things as they can be used for anything from medical bills to home renovation, or even consolidating high-interest debts. 

You might be considering applying for a joint loan, using a co-borrower. Or you could also consider a balance transfer loan which will pay down balances on your credit card. These could both be options for you in controlling how you use your loan.

APR & Interest

A loan interest rate will be calculated based on your loan balance, it will be a percentage of it. The APR rate is the total, real cost of the loan as it includes the interest rate and all other fees that the lender charges. 

What interest rate you get will vary depending on the size of your loan, the lender, and how creditworthy you are. Interest rates can slap an extra thousand or more dollars onto the cost of your loan. 

This is part of the reason why you should compare interest rates between a plethora of lenders, looking at how much they offer and the APR of the loan as well. 

Prepayment

You should also be aware that some loans will have a prepayment fee, which means that you get charged extra if you decide that you will pay the loan off early. It can be a hidden fee in the loan agreement. So, you want to better understand what exactly you are agreeing to before you agree to it. 

If you accept a loan that has a prepayment fee, there is no going back. You cannot change this.

Loan T’s & C’s. 

Before you agree to anything, note all the terms and conditions. We are all in a habit of skim reading T’s & C’s, but when it comes to loans you want to pay attention. To properly evaluate how good the loan is for you, pay attention to the small print.

Terms can include how much time you will have to repay your loan if the interest rate is variable or fixed, and what collateral is in place if any.

Will This Loan Meet Your Needs?

Always consider how much a lender will be willing to let you borrow and how this lines up with your financial requirements. Some people might start by taking out a loan that is less than they need as it is the largest they can afford. 

This is a wise move, as even if a loan is less than what you need, it can help to ease cash flow until you can move further on in your financial goals.

This is even true for consolidating credit card debts, using the funds from personal loans to pay them off, starting with the highest interest rate first. Since personal loans have a lower rate, they can save you. Once the cards with the highest rates are eliminated you can roll those payments over.

Can You Meet The Monthly Payment?

The most important question of all is can you afford it? If you accept offers on loans with a payment that is higher than you can afford this can damage your credit score, and your financial health in the long run. 

Never agree to something that puts you too tight on cash.

Is The Interest Rate Reasonable?

Interest rates depend on your credit history a lot and how much debt you will have about how much your income is. It is luckily very easy to compare loans and find the option with the best rate.

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Finance Monthly is a comprehensive website tailored for individuals seeking insights into the world of consumer finance and money management. It offers news, commentary, and in-depth analysis on topics crucial to personal financial management and decision-making. Whether you're interested in budgeting, investing, or understanding market trends, Finance Monthly provides valuable information to help you navigate the financial aspects of everyday life.
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