There may be a number of reasons why you need a loan. These reasons can range from needing a short term cash fix, through to taking out a mortgage loan on a home. Whatever the reason, however, it is necessary to think through a number of key factors involved in taking out a loan. From understanding the types of loan available, through to whether or not you’ll be able to repay the loan within a specific amount of time, these factors should be considered alongside a healthy degree of caution over whether you need a loan or not.

1 – Types of Loan

Loans are typically divided into secured and unsecured forms. Secured loans are made against an asset such as a home, and have low interest rates, but may be spread out over a long period of time. Unsecured loans, by contrast, are not secured against an asset, and have higher percentage rates. The amount of interest on a loan is set by the lender, and is often relative to national base interest rates set by the Government.

Most people that want a short term personal loan do so with the expectation that they will have to pay a lot of interest. This is the case for payday loans, which require repayment within a month to a few months of the loan being taken out. Other loan options include unsecured guarantor loans, which are loans where the security is provided by a third party for borrowers with poor credit histories.

2 – Duration of Repayments

Perhaps the most important issue to consider when taking out any kind of loan is whether or not you’ll be able to pay back the principal of the loan, and any interest. While it may be tempting to take out a short term payday loan, the rates for these can be as much as 4,214%. Similarly, a long term mortgage loans represents a significant commitment to making a repayment. You need to know that you will be in a position to make regular repayments.

3 – Inflation and Interest Rates

It is also worth keeping an eye on inflation and interest rates. The base rate of interest is currently set at 0.5% as the Government try to curb inflation by encouraging investment. If you have a tracker rate mortgage, you will be able to benefit from this low interest rate. However, you may be hit if you make any investments alongside a loan, which depreciate with low interest rates.

4 – Credit History

The health of your credit history will affect whether or not you are eligible for a loan. Problems with repaying credit card bills, or previous defaults on a loan will result in you having a low credit history, which typically means that a lender will be uncertain about giving you a loan. In this case, you can consider the option of finding a guarantor to cover the security on your loan.

5 – How Much You Need the Loan

Always think carefully about how much you actually need a loan. Is it for an emergency, or for a long term home or car plan? Is it better to save up the money, rather than get into debt, or have to pay high interest rates? The difference between getting a short term cash payment and waiting to save should also be considered if you do decide to apply for a payday loan.