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Open thread: What advice would you give to someone taking out a loan?

Let us all learn from your wisdom.

IF YOU’VE EVER taken out a loan, you know it’s a serious consideration that requires a lot of thought.

There are lots of questions that need to be asked – and who better to get advice from than someone who’s already gone through it all?

So, we want to hear from you – what advice would you give to someone taking out a loan?

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We’ve rounded up 7 of the most important questions we think a potential loan-taker should ask before applying for a loan and then we want to hear your best suggestions in the comments below.

 1. Do you need it?

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Do you? Really?

Could you save up for what you want instead of borrowing?

As you will pay interest on any loan you take out, the best way to avoid this cost is to save up the money you need in advance.

Sometimes this isn’t possible – maybe you need a car for a new job and don’t have the time to save, but for holidays and the like a little budgeting could go a long way.

Check out the Competition and Consumer Protection Commission’s budget calculator here and see if you can save up instead of borrowing.

2. How much you can afford to borrow?

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It’s imperative to work out your finances to the last penny so that when repayments happen you know that you can afford them.

There are a number of other factors the lender will take into consideration when calculating how much you can afford to borrow, such as -

  • Your income
  • The security of your job
  • Your credit history
  • Any outstanding loans
  • Any savings
  • Whether you’re borrowing alone or with someone
  • Whether you have a guarantor to cover the loan if for some reason you can’t.

All of these factor in to your ability to even obtain a loan let alone how much you’ll be able to borrow.

3. What type of loan should you go for?

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There are many different loans you can apply for from short-term (for a car or holiday) to a mortgage on a new property.

It is important to weigh up exactly what you need the loan for and if it’s an expense you can afford.

4. Can you afford the repayments?

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The bottom line is – a loan is going to cost you money. If you’re already stretched to the limit, it might seem like a great idea to borrow some money to get you out of a tight spot – but ultimately you’re going to spend money paying it back, so you need to weigh up whether that’s an expense you can afford. You can use the Competition and Consumer Protection Commision’s loan calculator to help you work out your repayments.

It might be preferable to talk with any existing loan or credit card providers that you already have and see if you can negotiate better rates on existing loans, if that’s your situation, or look at budgeting your earnings differently and saving up for that holiday instead.

5. How long should you borrow for?

The longer you borrow for, the more your loan will cost you.

Below is a chart showing how much different length loans will cost you.

There’s quite a difference in cost from 12 months to 36.

Consumerhelp.ie, Competition and Consumer Protection Commission Consumerhelp.ie, Competition and Consumer Protection Commission

A general rule of thumb is -

  • For holiday loans – aim to have it paid back before the next holiday
  • For car loans – 3-5 years is the goal
  • For home improvement loans – 5-7 years is a good length of time to aim for.

6. How much will it cost you?

An important factor to take into consideration is the interest rate on the loan – known as the APR (annual percentage rate). This can dramatically increase the cost of your loan, as shown in the chart below.

It’s worth shopping around for loans from different lending institutions and comparing APRs and other terms to make sure you’re getting the best deal for your circumstances.

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Additionally there could be other fees and charges from the lending institution so make sure you’re aware of them.

7. Fixed or variable rates?

Depending on how much you’re borrowing there are advantages and disadvantages to taking either a fixed or variable rate loan.

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It’s important to weigh up which suits you and your needs better.

What advice do you have for someone applying for a loan? Let us know in the comments below.

The Competition and Consumer Protection Commission’s consumer website, Consumerhelp.ie, provides information on consumer rights and personal finance to make an informed choice on important decisions. Head over to Consumerhelp.ie to find out what to consider when taking out a loan.

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