Deciding on a Loan

What is the one thing that all financial advisors tell their clients before committing to any financial agreement?

It is the most basic rule of all commerce; do you homework and shop around. While it may not be the most fun pass time in the world, getting familiar with the different lenders in the market, and the loans they offer, is vital when you are shopping for a loan.

This does not mean that you have to read in detail, all the fine print on every loan agreement you come across, but at least be broadly aware of what’s on the market and look carefully at any loans that you are seriously considering signing up for.

Also, as well as knowing the lender, it is vital that you know yourself and your reasons for borrowing the money. Different types of loans should be used for different purposes.

If it is to buy something that you will enjoy for a long time into the future, such as a car or your home, then a long term loan may be very appropriate. But if you are simply taking your annual vacation, then it is probably unwise to be using a loan that spreads out for more than a year.

Also, regarding the issue of security, while it is reasonable to use a mortgage secured over your home to buy or extend your house, or to conduct improvements, or secure your car loan over your car, it is not always so wise to secure credit card debt and other short term debts in this way. The bottom line, is that the characteristics of the loan should generally match the purpose of the loan.

You should also remember that all of these factors will also be effecting the price of the loan also. Basically speaking, the longer the life of the loan, the more expensive it will be overall, although your monthly repayments will be lower. Also, while you may not wish to secure short term borrowing over your home, doing so is also likely to reduce the cost of the loan considerably.

Once you know the type of loan you are looking for, you will be in a far better position to judge which kind of loans you will be looking for. This makes shopping around that much easier as you can look directly at the types of loans you need. You should also be aware of loan rip offs and stick to the basic rule of thumb that if something seems too good to be true, it probably is.