Every financial choice that we make essentially comes down to a decision. You need to weigh up whether it is something that you need and whether it is something you can afford. If the answer is yes on both counts, then you should go ahead.
Of course, it isn’t quite as simple as that – a number of factors go into deciding whether you need something and whether you can afford it.
When it comes to taking out a personal loan to pay for something, here are the factors you should consider for both of the key questions:
Can you afford it?
Once you’ve settled on a decision to buy an item – and that the best way to fund this is through a loan – then you need to work out whether you have the funds available to be able to pay it back.
It’s well worth going through your statements to give yourself a good idea of the amount of disposable income you have left after paying the bills every month. This might pinpoint areas where you can make savings but will show you straight away what you have available – and what would start to be a stretch. You might be able to physically afford a loan but if doing so means drastically changing your life then you need to be prepared to actually do this. Using the application process as an excuse to sort out your finances is a decent idea regardless.
You also need to recognise that the cost of borrowing will include interest and possibly fees and charges. If you’re taking out a loan for £10,000 then it’s not about asking if you can pay back £10,000, it’s about the true cost of repaying the loan.
Lenders will have to tell you their APR – a percentage figure that represents the amount you can expect to pay in interest and other charges. You can use this to compare the cost of the loan to other products when you shop around for the best deal. However, if you want to know exactly how much you’ll pay you can use a loan calculator – such as this one – so you’re fully aware of what you’ll end up paying. Consider the monthly impact on your finances as well as the long term effect of committing to this over months and years.
Once you’ve weighed all of this up you’ll be in a position to answer those key questions – do you need it and can you afford it – and make a smart choice based on all of the evidence.
Do you need it?
In this instance there are two factors to the all-important ‘need’ question. Do you physically need to buy the item in question? Whether it’s a car or home improvement, is this something that you definitely need to buy? If so, have you picked the right one to buy? Could you get a better deal elsewhere?
Secondly – and perhaps most pertinently – do you need to use a personal loan to fund it? Loans can be a cost effective way of affording big ticket purchases but they’re not the only show in town. Credit cards can be better for smaller purchases, especially if you find one with a 0% introductory rate on purchases.