Understanding Loans: Working Out How Much to Borrow

There are many types of loans available to those in need, and they’re available from many different types of lenders, such as banks, building societies, and even private companies like Nemo Personal Finance, remember that a Nemo Loan is secured on your home so always make sure you can afford the repayments. People tend to spend a lot of time looking at, and evaluating these options, and yet they often overlook one of the most basic considerations associated with taking out a loan: how much money they’re going to borrow.

If you find yourself in this position, here are a few things to consider:

Do You Actually Need a Loan?

The first thing to do when considering a loan is to sit down and work out how much cash you actually need at your disposal. Let’s say, as an example, that you need £5,000 to put towards home improvements. Before you look at lenders, is it possible that you could find some, or all, of this sum without borrowing?

Many people are loathe to dip into their savings, but these can provide a source of income, and taking funds out of them can save you money in the long run if the interest you earn on them is less than the amount you would pay on a loan.

You may also find that family and friends are willing to lend you money inteloansrest-free, although many might prefer not to ask.

It is also possible that, if the venture you’re saving towards can wait, you can simply save money over the period of a few months or years, and eventually pay outright without borrowing a penny.

Remember, any money you borrow will have interest attached, so it is always worthwhile to consider other ventures before taking the plunge.

How Much Do You Need to Borrow?

As mentioned above, you should think about how much you need before ever actually considering taking out a loan. This amount will be dependent on what you want to use it for, so make sure that you have a good idea before looking at your options. If you need £10,000 to buy a car immediately, for example, and have no other source of raising capital, then borrowing £5,000 will do little to help you. Make sure that your estimates are accurate before looking at different avenues for securing capital.

Consider, also, how much you have the capacity to repay, and factor in interest when you’re doing so. Failure to meet repayments can have very negative consequences, so if you know that you’ll never be able to pay back the amount you need to borrow, a loan isn’t for you, and you may have to put aside dreams of the object or venture that you were going to use the money for.

Assess the Total Cost of the Loan

Once you know how much you need to borrow, plus how much you can afford to repay, it’s time to look at your options, considering the real cost of the different loans available to you. To do so, you’ll need to factor in the following:

APR

APR is the annual rate of interest that you’ll pay on the money you borrow, and can significantly increase the sum you need to repay.

Fees

Many loan companies will charge you a number of different fees for using their service, from setup to admin costs. Don’t forget to add them to the overall equation.

The Term of the Loan

The length of the loan you take out will largely determine the amount you pay in interest. If, for example, you borrow £10,000 over a term of two years, your interest payments are likely to be significantly lower overall than if you borrow the same amount, but make repayments over the course of three years.

These must all be added to the amount you borrow to estimate the total amount you will repay.

Loans can be a useful tool for helping people to secure capital that is not immediately available to them; however, as with most things in life, they do have their downsides. It’s very important to be aware of these, and to fully understand what you’re agreeing to, before borrowing money. If you still feel that loaning is for you, do your research to make sure that you choose the best possible option and don’t leave yourself out of pocket in the long run.