Taking out a loan to take care of an unexpected expense or purchase something you have always wanted is a decision you should not take lightly. It is common for many people to feel the need to apply for a loan at some point in their lives depending on their circumstances; however, if you’re one of these people, make sure to get the best possible deal.
While there is a vast array of loans you can choose from, taking out an affordable loan will certainly help you prevent many of the headaches associated with paying back the amount you borrowed.
If you’re seriously considering taking out a loan, here we have compiled several tips for helping you make an educated decision and finding a loan you can afford.
How to tell if a loan is affordable
When dealing with loans it is key to compare what the market has to offer to find the best possible deal for you.
Just like with any other financial products out there, comparing loans can be tricky, especially if you’re not familiar with the jargon. However, and as a general rule of thumb, make sure to always compare loan rates and the potential cost for the amount you want to borrow from all the lenders in your list. Additionally, it’s also wise not to limit your options to the traditional and well-known lenders when comparing rates.
The first way to tell whether a loan is affordable is by looking at the quoted Annual Percentage Rate (APR). This rate incorporates the cost of the loan, including the interest rate and any other additional fees. By comparing different rates you can tell which loan offers the most affordable rate possible for the amount you need.
Then, make sure to check whether you meet the requirements to take out the loan you’ve chosen. Lenders often restrict the availability of their loans and only give them to those with a healthy credit rating. By comparing your income and your expenses, loan providers will calculate whether you can afford to take out a loan.
Focus on the TAR
Total Amount Repayable (TAR) is a good way to determine how affordable a loan is. This figure tells you the total amount of money you’ll be expected to pay back for your loan, including any other costs and fees.
By comparing the TAR, you will know for certain which loan is the most affordable. The lender offering the lowest TAR is also offering the best possible deal.
How to tell if you can afford a loan
If you have decided that taking out a loan is the next move for you, then you have to figure out whether you can afford to do it. One thing is knowing how to tell if a loan is affordable, but one aspect many people often overlook is determining whether they can afford a loan - however affordable it might be.
By looking at your expense to income ratio, you can tell whether you can afford a loan or not. This is because it helps you determine the degree to which you will be able to keep up with the payments considering your debt obligations as a whole.
This ratio tallies up your monthly expenses, like mortgages, credit card payments, other loans, and divides that number by your monthly gross income. The resulting number will give you a sense of whether you are in a good place to take out a loan.
Lenders and financial advisers often use a similar calculation to help you determine if your repayments are fair, affordable and realistic. Not doing so can result in serious financial difficulty.
How to avoid expensive loans
As you might already know, a loan is not a free sum of money. Loans, as discussed above, come with interests and other fees, which is why you end up paying more than the original amount of money you requested. So, how to recognise when to stay away from a loan?
The best way to do this is by calculating the true cost of a loan. And although it can be confusing, knowing how much a loan really costs before agreeing with your lender will spare you from future difficulties.
You probably have some experience dealing with loans and debt in general; however, regardless of how common credit is in our culture, people normally don’t think about how much interest they will pay over time.
Trust the APR
Your Annual Percentage Rate (APR) is a good indicator of a loan’s real cost. As mentioned before, the APR is calculated using the monthly interest rate plus the additional fees and costs of the loan. This makes this APR a reliable indicator of how much you will be paying for a loan each year.
While a low monthly interest rate sounds fantastic, it’s vital to be aware of the other fees that add up. Your loan provider may have early repayment fees, late payment fees, and even origination fees for simply taking out the loan. Always read the small print thoroughly.
However, just because you see a loan advertised at an attractive APR rate, this doesn’t mean you’re guaranteed to get it. Since loan providers are only obliged to display the typical APR to two-thirds of potential borrowers, we always recommend double-checking what rate of interest you will be charged.
Choose a reliable lender
Educating yourself on basic finances and the jargon commonly associated with loans is certainly the best way to avoid an expensive loan. Besides, it will help you choose a reliable lender. Trustworthy loan providers are those who are transparent about fees, interest rates and how much the loan will cost you.
Why Salad Money can help you take out an affordable loan
Our service is geared toward helping customers find the most affordable loan according to their circumstances. We focus on making this process easy and quick while being transparent about costs and fees.
Once you have chosen the type of loan that best serves your needs and have understood and agreed with the monthly repayments, we strive to transfer the funds as soon as we can to avoid further delays. We also use open banking and state of the art online financial insights to help customers find their financial stability.