No matter what your reasoning is for a loan, whether it be business, personal loan, or other, you’re about to make a big decision that will affect you for a really long time. If you’re a little bit nervous about it, you should be, because loans can determine your credit rating and your flexibility in life for years to come. When you get involved in a bad loan that you can’t afford to pay off, you’re setting yourself up for financial woes for potentially even the rest of your life.
To help you out and keep you away from these potentially dire situations, we’ve put together 10 things that you ought to consider before you take out any type of loan, big or small, high risk or low.
- What are the interest rates?
Interest rates are number one on this list for a reason. The amount of interest you pay will seriously affect the length of time you’re paying a loan as well as the total amount you pay overall. When you first start paying off a loan, you’ll be paying mostly the interest in the beginning, and it might take a while to even get to the principal amount to pay off. You can reduce this time by finding a lower interest rate loan.
If you’re having a hard time understanding how much your interest rate would be for a particular loan length, use an interest rate calculator like this one. Also check out this article for some more help with finding a low interest loan.
If you’re already in a loan and considering trying to switch it, make sure you speak with a consultant like a tax accountant in Auckland first to find out what kind of fees you might incur or how it might affect your year end taxes. Moving to a low interest rate is usually a great idea, but only if you aren’t paying exorbitant fees.
- What is your credit rating?
Your credit rating is determined by multiple things, like your payment history and how much available credit to debt ratio you have. If you have a strong credit rating, you’ll be more likely to qualify for a lower interest rate. To check your current credit score, use the New Zealand government website guide.
- Do you actually need it?
If you’re looking at business lending in New Zealand, for example, consider asking your business partners if there are other ways you can find the resources for the money you need. If you’re taking out a personal loan for a new car or other item, make sure you have a candid conversation with yourself about your reasoning behind wanting the item, and if you could live without it for a while.
- What’s the long term?
Any type of loan is going to be with you for some time, which means you’ll need to consider what the future looks like for your loan as well. For example, is your current income steady, or is there a possibility of losing any income in the future, and do you have a plan for being able to pay your loan in that case?
Going in a different direction, what is the future looking like for interest rates, and is there a chance that loan rates will be going down anytime soon? If you could hold off for a couple of years, would you get a much better rate? These types of questions can be hard, since none of us know the future, but should be something to consider.
- Will you need insurance too?
Since you’ll be spending a hefty amount of money on whatever it is you’re getting the loan for, you’ll want to seriously think about asset protection. For example, if you’re getting a loan to buy a new tractor for your farm, there’s NZ farm insurance that can cover you in the worst case scenario.
- Should you have a financial advisor?
When you start balancing multiple loans, it might be time for a financial advisor. Mortgage financial advisors in Wellington can assist with consolidating and managing your loan, and help advise you on tax issues and saving for the future. Some asset finance providers may provide financial advice as well, so just find out what your options are.
- What are the charges?
If you forget a payment, how much will it cost you? All loans will have slightly different fees, so if you’re prone to late payments, find one that is more lenient on late payment fees.
- How long is the loan?
Find out the length of the loan right after you’ve taken a good look at your future finances. Can you afford to be paying a loan back for 30 years? Can you amp up your monthly payments to shorten it?
- Is there a down payment required?
If you’re looking at a bigger loan, like a car loan or mortgage, there’s a good chance you may need to provide some sort of down payment. Find out what you can afford for a down payment before you go any further, as this will eliminate options that you just can’t afford.
- Repayment flexibility
Is there an early payment fee with your loan? Or, is there a fee to pay off the loan early altogether? Although it sounds a bit backwards, these types of fees are in place so lenders get the most out of their loan to you, so you’ll want to research it.
Obviously these ten things aren’t foolproof, and you’ll absolutely need to do your own research and take responsibility for your own risks. You should also make sure you’ve got the right professional help, like accountants in Auckland or financial advisors, as mentioned above. By being prepared with your own knowledge and combining it with this article, and a trusted advisor, you’ll be much safer and more secure in whatever loan you decide to go with.