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Understanding loans and credit
Working out what you need and what you can afford
The information in this guide was last updated on 26/02/2014
Before you take out a loan, make sure to check that you can afford to pay it back. Here are a few things to think about before signing on the dotted line.
Look carefully at the annual percentage rate Annual Perecentage Rate (APR) you’re offered on your loan agreement – this is the actual APR you’ll be charged and can be different from the advertised rate.
It means there is more to pay back than simply the money you have borrowed, so make sure you take this into account when working out how much you can afford to borrow.
Check the loan agreement to see how much you’ll be expected to pay back every month; with most loans you’ll pay back the loan amount plus any interest in monthly instalments.
If you can’t pay this back you’ll often be charged, making the loan even more expensive. Missing payments will also affect your credit rating, making it harder to borrow money in the future.
If you already have a budget, make sure you have enough money each month to cover it. If not, make a list of your income and your essential spending in a typical month to see how much is left over.
Is there enough to cover the monthly repayments? Remember to factor in some spending money too for non-essentials, otherwise your loan repayments could leave you with nothing come the end of each month.
More about setting a budget
Our Borrowing guide provides an easy, step-by-step guide to the different borrowing options available.
Take a long-term view – once you’ve paid off the loan and interest how much will you have paid in total?
Sometimes by increasing your monthly repayments and borrowing for a shorter period, you can make it cheaper over the life of the loan. But remember to be realistic – never make the monthly repayments higher than you can afford to pay.
Also take into account any fees and any early repayment penalties – these may be charged if you pay the loan off early or if you make overpayments.
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