5 Things You Need to Know When Taking Out Your First Loan

Are you taking your first loan and have no idea what you should know?

Perhaps you are new to the lending world and want to know more about it before borrowing? Or maybe you are curious and want to know more? Whatever your reason might be, I have the answers for you!

Taking out your first loan can be a stressful experience for many people. With so many unfamiliar terms, confusing interest rates, and different lenders, it can be hard to know the best loan for you and what steps you should follow. It leaves many people with a headache and sleepless nights worrying about how they will get their money. 

Well, no more! Today I am here with the five things you need to know when taking out your first loan. Keep reading to find out what you should know and learn more about the borrowing process. Take yourself from loan novice to expert in no time! 

Five Things you Need to Know when Taking out your First Loan 

Before taking out your first loan, there are a few things you should know. Knowing them will help you find the right loan for you and increase your chances of being approved! But this information isn’t always easily accessible. And that’s where I come in. 

To help you, I have five things that you should know before you take out a loan. These five things will help you decide if a loan is the right step for you and take the finance option that is best for you! Let’s get into the five things you should know now!

1. Know Why you Need to Borrow the Money 

While it might seem like an obvious thing to know, knowing why you need to borrow the money is the first thing you should establish, taking out a loan is a big step, and you can find yourself in dangerous waters if it is not managed properly. So be sure to take some time to look at your finances and see why you need to borrow the loan. 

Is it to buy your own home? Or is the money to help cover car payments? Or is the loan to cover emergency repair works on your property? Consider why you need the loan and what the money will be used for. Not only will this help you better understand your finances, but you can use this information if needed on your loan application form. 

If the need for the loan isn’t urgent, it can be worth looking at your finances and seeing if you can build up a savings fund that can help cover emergency bills or car payments in the future. Not everyone is in a position to do so, but for those that can, it is worthwhile and saves you from needing to make loan and interest repayments in the future. 

If the idea of holding off and saving is not suitable for you, then keep reading. Not everyone can save part of their money, especially those living paycheck to paycheck. Loans are a lifeline to those without savings in an emergency, so if you need to take a loan out, then take it out. Just be aware of what you are doing beforehand, and read all the information provided. 

Keep reading to see our four other things you should be aware of before taking out your loan. 

2. Know all of your Options 

Once you have worked out why you need the loan, it's time to know all your options. Depending on the loan you need, you will have a few different options to choose from. Often, the quickest and easiest method is to take out a personal loan with a bank you already use. You can make an appointment to apply for a loan and often get approved there and then! 

Applying with your current bank also makes it easier to manage the money and ensure that you can repay on time. However, just because it's quick and easy, it doesn’t necessarily mean it's the best option for you. There can be better deals online that will allow you to save money and access lower interest rates. 

Be sure to make the most of comparison sites to shop around and find the best deal that will suit you. It's also worth looking to see if there are any government or federal loans or grants that you could tap into; these often come with lower interest rates, or in the case of grants, they don’t need to be paid back! 

Spend some time doing your research and find the best deals for you. 

3. Know How Much You Can Borrow 

Next, turn your attention to the amount of money itself. You will need to know how much you can realistically afford and payback. Now, it can get a little tricky here. Just because you have the money in your account to cover the monthly payment doesn’t mean you can afford the loan. Many people across the country live in homes they cannot afford or drive cars they cannot afford. 

While that can be a scary thought, it's best to use this information to reconsider how you view affording something. Instead of looking straight at the APR of the loan, head to the TAR or total amount repayable. This will tell you how much you will borrow and the interest you will pay throughout the loan. So while a loan might have a lower APR, if the loan is spread over a longer period, it can wind up costing you more throughout the loan. 

It might not seem like a lot of money at the time, but any money you can save when paying your loan is a bonus! When looking at a loan, consider the monthly payment and the total amount you will pay back to ensure that you can afford the loan. 

4. Know Your Credit Score 

Before taking out your loan, you will also want to check your credit score. Checking your credit score will allow you to see your chances of qualifying for the loan you want. Your credit score shows lenders your previous credit history and if you have missed any payments. They will use the score to determine your approval for the loan, so it's worth knowing before applying. After all, you don’t want to apply for a loan and be rejected, do you? 

The better your credit score is, the more access you will have to low interest rates, low payments, and the chance to save. Lenders will look kindly on higher credit scores, and you will have a better chance of getting the loan you want. Check your credit score beforehand using one of the free online checkers to see where you stand. 

You might need to build your credit score before applying for the loan you want, but you can do this by making payments on time or using a credit card (just be sure to pay it in full to avoid interest charges). 

5. Know All the Terms of Your Loan 

Finally, check that you know all the terms of the loan before signing on the dotted line. You will want to know the APR, the total cost of the loan, and any fees that you might need to pay throughout your loan. Be sure to check how interest is calculated on the loan, whether it is pre-calculated or compound interest, as this can help you work out when is best to pay the loan and how much you should pay to avoid hefty interest payments. 

Hidden fees or lesser talked about fees can often be included in loans. To help you navigate the paperwork, here are some of the most common to keep an eye out for! 

• Failed payment fee - if you don’t have enough money in your account to cover the payment, you can incur a small charge. 
  
  
• Prepayment penalty - You can be charged a fee for many personal loans if you pay the loan off early. This is usually done so that lenders still get the entire interest from you. Be sure to check your loan does not have a prepayment penalty before signing the loan.
  
  
• Late payment fee - if you fail to pay your loan payment on time, you can be charged, and it might be one charge, or you might be charged daily until the payment is made. Late payments can also damage your credit score. 
  
  
• The loan processing fee is more common with mortgages, but you still see it on personal or other loans. The lender will charge you to process your application. The amount will vary, but avoid them where possible or see if the fee can be waived in most cases. It's unlikely to happen with mortgages, but you should have some luck with other loans. 

Final Word 

And there you have it, five things you need to know before taking out a loan! Be sure to use these to help find the right loan for you and make sure you have all your information ready before you proceed. Applying for a loan can be a scary process, but it doesn’t need to be! Just be sure to use our tips provided and only borrow what you can afford to pay back.