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Are you planning on taking out a loan? Before committing, it may be good to ask yourself a few questions, especially if it is a major financial decision. These questions might help you understand the financial responsibilities that come with taking out a loan and to protect you from any misunderstanding with the loan agreement in the future.

Here are six questions you might want to ask yourself before taking out a loan.

1. Do I need to take out a loan for this purchase? 

Before taking out a loan, it's important to evaluate whether it’s truly necessary. This makes sure that you don’t take on any unnecessary debt. 

Here are some things to consider when deciding if taking a loan is a necessity and the only option.

• Is the purchase urgent? Determine if the purchase is essential and is something that can’t wait, such as medical expenses, home repairs or car repairs.
• Do you have an emergency fund you can use? Using your own money could help you avoid borrowing and paying interest, keeping you in control of your finances. 
• Are there alternative options? Consider if other options can help you with your emergency, such as borrowing or renting the item needed.

Pro Tip: Some lenders may not approve your loan if there isn't a valid reason for borrowing, though eligibility criteria can vary between lenders.

2. Can I afford to take out a loan?

Another important consideration you might want to consider is whether you can afford to take out and repay your loan. This might include reviewing your income and expenses to gauge if you will be able to meet your repayments.

Here are some points you might want to consider when determining whether you can afford to take out a loan.

• Financial commitments: Consider reviewing your budget, making sure that you’ve taken into account your current and future debt and expenses. For example, you might want to consider your living expenses, recurring payments (subscriptions, memberships and services) and other debt repayments. This might give clarity on your overall expenses. 
• Financial stability: Making sure that you have stable recurring income might be helpful in making more accurate calculations, as you will know your recurring income. With that you might be able to calculate your overall excess cash by subtracting your financial commitments to your recurring income.

Pro Tip: The Beforepay app has a free budgeting tool that allows you to view your income, track your spending, customise your budget and see our predictions for any upcoming bills so you can feel confident and in control when it comes to your money.

3. Which loan type is right for me? 

Understanding different loan types and how they work can help you determine the total cost of the loan and which option is best for you without pushing yourself beyond your means. It could also help you plan your finances more accurately. 

Some loan types you might come across when considering a loan include:

• Fixed rate: Having a fixed rate means that your interest rate stays the same regardless of market conditions. However, keeping up to date with market conditions might still be useful as you might be eligible to swap to a better rate. 
• Variable rate: Having a variable loan means that you are impacted by market conditions. Keeping up to date with the conditions might give you an indication when your interest rate will change, potentially prompting you to do some additional budgeting or planning. 

Pro Tip: Knowing what interest rate you are on, understanding what it means and how it works could help you make smarter decisions about your finances. For example, if the market improves and interest rates drop, you might be eligible to refinance or you could make early repayments.                                                                

4. What are the fees associated with taking out a loan? 

Understanding all the fees associated with a loan can help you have a more complete view of the total costs involved. This can help you decide which loan option is right for you and if it is within your means. 

Here are some fees you might want to look out for:

• Upfront fees: Some loans may come with application or establishment fees, these are called upfront fees, as they are charged immediately. Making sure you know what they are and how much they are, can help provide a better understanding of the total cost.
• Ongoing fees: Be aware of any monthly or annual fees that might be added to the loan repayments. This ensures that you are aware of your payment amounts and don’t end up missing or failing a repayment, as this might incur extra interest charges.
• Early repayment fees: Some lenders might impose penalties or fees if you want to pay off your loan early. However, if you noticed this beforehand and can see yourself repaying it early some lenders might be open to negotiation. 
• Late payment penalties: Understanding the consequences of missing a payment might be important as they can add up quickly. 

Pro Tip: If you’re unsure about any terms, ask your lender directly to clarify all potential fees before signing. If you're looking for a simple, low-cost option, Beforepay's Pay Advance charges only a 5% fixed fee for each advance, and doesn't charge any interest or late fees."

5. Am I clear about the details of my repayments?

Understanding your repayments helps you stay on top of your loan and could help you avoid additional costs from missed payments. Some details you can keep an eye out for include: 

• Payment schedule: How often are you required to make repayments (weekly, fortnightly, or monthly)? Make sure it fits with your income schedule.
• Repayment amounts: Understand how much your regular repayments will be, and whether they fit comfortably within your budget.
• Extra payments: Check if you’re allowed to make extra repayments without penalties, which can help reduce the loan principal faster and save on interest.
• Repayment extension: Check if you are allowed to request a change of repayments in cases of emergencies. Some loans like Beforepay’s Pay Advance allows you to reschedule your repayment.

Pro Tip: Making sure you stay on top of your repayment is important, as missing a repayment could damage your financial reputation and increase your financial burden. Here is our blog on how you can stay on track with your repayments and the benefits of staying on track.

6. Have I read the fine print?

When signing a loan agreement, reading the fine print could help you have a full understanding of your obligations and rights related to your loan. This could help you stay on track with your loan and avoid getting caught up in hidden fees and other costs. 

Here are some key areas that you might want to have a look at:

• Interest rate details: Check whether the rate is fixed or variable and how it is calculated. Make sure that it aligns with what you agreed upon or expected.
• Loan default conditions: If you default on the loan, there may be consequences, such as potential legal actions or damage to your financial reputation. In some cases, lenders can take your collateral as payment the moment your default.
• Collateral requirements: If you are applying for a secured loan, make sure you check what assets are tied to the agreement and the risks involved. This is important to make sure you aren’t putting the wrong collateral and you know when you’re asset will be out of the collateral agreement.

Pro Tip: If you don’t understand any part of the agreement, don’t hesitate to task your lender for clarification. It’s better to address any questions before signing it since once signed it is not amenable.

Before signing for a loan, it’s crucial to be informed and diligent. Taking the time to review the terms, costs, and repayment structure can help you avoid unpleasant surprises down the road and set you up for successful loan management. If in doubt, seek advice from a financial advisor to make the best decision for your financial health.

Disclaimer: Beforepay Group Ltd, ABN: 63 633 925 505. Beforepay allows eligible customers to access their pay and provides budgeting tools. Beforepay does not provide financial products, financial advice or credit products. The views provided in this article include factual information and the personal opinions of relevant Beforepay staff and do not constitute financial advice. Beforepay and its related bodies corporate make no representation or warranty, express or implied, as to the accuracy, completeness, timeliness or reliability of the contents of this blog post and do not accept any liability for any loss whatsoever arising from the use of this information. Please read our Terms of Service carefully before deciding whether to use any of our services.