How to Know if a Loan is Right for You

What are the criteria for assessing if a loan is the most appropriate for the buyer’s needs?

At some point, just about everyone has to take out a loan to pay for something. It’s a very important decision that shouldn’t be taken lightly. Depending on your understanding of the loan facility, or how loans work in general, you could make a decision that could impact your financial future.

Types of Loans

There are several types of loans, each with different structures to suit different circumstances. All come with their own pros and cons. Two common loans include standard and interest-only. Standard loans involve regular repayments which cover the principle amount borrowed and interest charged. If you have a standard loan with fixed interest, you won’t be able to pay off the loan early without incurring additional costs. This mitigates the lender’s potential losses for the interest you would no longer be paying. Interest-only loans designate a period over which repayments only cover interest. This means initially lower repayments before increasing. As such, they might be appropriate for those taking out loans for investment properties. You should take thorough review of loan types to assess which is best for your situation.

Loan Term

Most people opt for a 30-year loan term with the plan to make additional repayments to pay the loan off quicker to reduce the interest paid. By taking the loan over the longer term it can make the assessment more favourable. You should aim to pay the loan off over the shortest term during which you’ll be able to consistently make repayments without incurring financial jeopardy or hardship. While a longer term means lower repayments, it also means that the total interest you pay will be much higher.

Interest

This is a big call. You always want to look for the home loan that best fits your needs. Interest rates are a vital part of this. The variables linked with interest rates can make it a very complicated part of the loan process, so finding the best fit for your circumstances must be done thoroughly. Lower rates are more frequently sought after – even a fraction of a percentage lower can yield savings of thousands over the loan’s term. You’ll also need to consider whether a fixed or variable interest rate is better for your situation. Fixed means the rate will remain constant for a predetermined period of time, before becoming variable or a new rate is discussed. As discussed earlier, you won’t be able to pay off a fixed loan before its term without incurring prepayment penalties passed on by the lender. This type of interest makes budgeting far simpler but prevents you from benefitting from falling interest rates. Variable rates fluctuate with the lending market, offering more flexibility, but convoluting the budgeting process.

Affordability

You need to budget and calculate what you can afford. Your financial situation is subject to unforeseen change, so you need to know what you can feasibly repay should you encounter these. By looking at the amount borrowed added to the interest over the length of the loan, you’ll find the total amount repayable (TAR). TAR is an absolute figure with which you can compare the total expenses of loan options. When doing this however, you must be careful to consider how your ability to repay will fluctuate over time. The lender will always use an assessment rate higher than the actual rate, which will increase as the market fluctuates to allow for any increases in future repayments.

Loan Brokers

There are many things to consider when choosing the right loan and speaking to an experienced broker can help you with this complex process. This is something to consider if you’re struggling to make heads or tails of the situation or want to ensure you’re getting the right advice.

We all want to repay as little as possible. It’s crucial to take your time and consider every element. For more information about deciding if a loan is a good fit for you or what’s the best rate on offer, speak to our experienced team at Provide Finance.

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