Working out what you need

The information in this guide was last updated on 26/02/2014

Before you apply for a loan, you’ll need to decide how much you want to borrow and how long you want to borrow it for. Here are some things to think about before you apply.

Do you need a loan?

It probably seems like an obvious question, but if you’ve got money to spare elsewhere you may not need a loan at all – or at least, you might be able to reduce the amount you need to borrow. It might not be prudent to take money from long-term savings, but if you do have money that’s not committed to another goal consider whether you could use it instead of borrowing.

It could be cheaper too – if the interest you’re earning on your savings is less than the interest you pay on any money you borrow, it will cost you less in the long-run.

If you don’t need the money now, it could be a good idea to save for a little while to raise some or all of what you need. It means you could need to borrow less, making it cheaper.

How much do you need to borrow?

This all depends on what you want the loan for, so do your research first and find out how much you’ll need – that way you can look for the best deal on the exact amount you need to borrow.

How long do you need it for?

This is known as the term of the loan. It’s the length of time you’ll be paying back the money as well as any interest on it.

It’s also useful to think about what you’re buying with the money – if it’s for something that’s only going to last three years, try to find a loan which you’ll have paid back by then. If you took out a loan for five years, you’d still be paying it back two years after you stopped using it.

What’s more, a longer-term loan may have lower monthly payments but the overall cost will probably be higher.

What’s the cost of the loan?

Think carefully about the cost of the loan. There are a few factors to consider which affect the overall cost:

  • APR – this is the annual rate of interest you’ll pay on the money you borrow
  • Any fees – you may have to pay setup fees on a loan which can add to the cost. These will be included in the APR advertised, so you can compare loans to find the best value
  • The term of the loan – this is the length of time you’ll have to pay the money and any interest back. Loan providers can offer lower monthly repayments, but spread over a long period of time. So the total you repay over the life of the loan could be high.

Can you use any existing debt facilities?

Rather than taking out a new loan, you may be able to borrow money by taking out an overdraft on your current account. This could be simpler to arrange and might even cost less – but do make plans to pay it off, or you’ll end up paying a lot of interest in the long term.

Some mortgages also allow you to ‘withdraw’ money by adding to the total you’ve borrowed. Mortgage debt usually has a low interest rate compared to a personal loan, but remember that this debt is secured against your home – if you can’t keep up repayments, it could be repossessed.