What do I need to know before getting a loan?

Question

Recently, due to a series of events, I've been finding myself... uncomfortable with my financial situation. I'm not in debt, but my account balance did drop into the low three-digit figures a couple of months ago and I felt afraid.

Currently, I have money (having recently been paid at work). However, I've been zig-zagging a lot. I have yet to actually run out of money, but like I said it's feeling very uncomfortable at times.

I've been mulling over the idea of taking a loan, with the goal being to give myself a bit less worry. My bank offers loans and I've been experimenting with the sliders on their page (idly amusing myself at the thresholds, like "if I get £50 more right at this point, I pay £200 less back overall") and as an example a £7,500 loan over two years gives monthly payments of £330, which I'd be okay with.

However, I greatly dislike owing money, or having money owed to me. When I took out a student loan, I paid it off in full at the first letter I received (because, at that time, I had money!) So taking out a loan is kind of a scary prospect to me, and I'd like to make sure I know what I'd be getting into.

Any advice on this matter would be greatly appreciated, thanks!

Answer 1

You need to know loans are not free; and they are not a way to solve budget issues.

If you are having problems with making your income last over your expenses, you do not need to add another expense (in the form of a loan)

What you really need to do is create a budget, track and understand your expenses, and then decide if you should focus on raising your net income level or cutting down expenses.

1. Track your spending for at least a couple of months
2. Based on the reality of your spending, make a budget
3. On a regular basis (weekly, every other day) track your spending against your budget so you know where you stand until your next paycheck

Keep up with your budget. You can reduce the frequency, but you need to track your spending really for the rest of you life. It is just a good habit, like personal hygiene.

Once you understand your money (via your budget), you can start to save money into an emergency fund that will cover you during the times of zig zags.

I say it very plainly as if it is super easy; but it requires will power and the foresight to understand that if you don't manage your money, nobody else will. Being sane with your money is one of the most important things you can do now to improve your future.

IMPROVEMENT NathanL has an excellent first step with budgeting:

Allocate money to be spent for the next month from money made during the previous month. This will build a cushion into your budget and alleviate the fear that the OP mentioned

Answer 2

A loan from a bank with no real purpose could be a bad idea and end up costing you more money than it needs to. As someone with a loan and credit card debts accrued over university, I would say avoid it if at all possible. Certainly don't sign up to a large loan if you have no current plans for the money (car, house repair, etc).

It sounds as though you're fairly careful with your money, but just want a bit of extra security in case a purchase you didn't account for slips by. If this is the case and you're set on obtaining a source of credit, I'd suggest getting an overdraft if you haven't already. Overdrafts are a lot more flexible, and are better for short term debt that you plan to pay off immediately, such as unexpected charges coming in at the end of the month.

It's worth mentioning that this is from the perspective of a UK banking customer. Overdraft conditions will vary depending on the country.

Answer 3

The most important thing in my view is flexibility, to avoid running into problems. One useful thing in the UK would be an arranged overdraft. You go to your bank, and they'll agree that you can overdraw your account by a certain number of pounds, depending on your income etc. It will cost you a very high interest rate, but only for each day where you are overdrawn. So paying a bill two days before your salary comes in isn't too bad. Obviously avoid using the overdraft if you can, having an overdraft while not using it is free. It's meant for an emergency; being regularly overdrawn is expensive. But once it is arranged with your bank, an arranged overdraft is much much cheaper than bouncing cheques etc. and possibly high fees for overdrawing your account. And it takes the pressure of you.

Now things to need before you get a loan (again, UK): The real interest rate that you are paying is called APR. That's the number that counts, and that cannot be manipulated. No "payday loans" to avoid getting yourself into deep, deep trouble. No loan sharks, obviously. If you buy things with "interest free credit", that's (a) included in the price, so you pay more, and (b) if you miss paying by one day they'll hit you with huge interest payments, and some will try this intentionally. Interest rate depends on loan amount. I once had to borrow 20% more than I needed because it reduced the interest rate by half... The 20% went straight into a savings account. Credit cards and overdrafts are much more expensive than loans. Mortgage is again cheaper than a loan usually. Make sure that you only use money from sources that charge the least amount. Make sure you pay back regularly so cheap sources stay available to you.

Just do yourself a favour and if at all possible, spend less instead of getting a loan.

Answer 4

Sounds like what you really need is a budget instead of a loan.

I like following the four budgeting rules recommended by the team at YNAB.

1. Give every dollar a job
2. Save for a rainy day
3. Roll with the punches
4. Live on last month's income

They even have software that helps you through the method even though you can use the method by itself without needing to buy the software.

I'm not affiliated with them...just a happy customer! Following these simple rules has allowed me to stop living pay-check to pay-check.

Answer 5

Could you perhaps expand on your reasoning behind wanting to take a loan in the first place? Why would you even consider taking a loan for as much as £7,500 (or even much less) if you aren't planning on buying / investing in anything in particular, and you're not in a bad financial situation?

If your account never drops below a hundred or two pounds, why would you need to loan money? Just get yourself a credit card, for those times when you might find yourself without money for a short while.

But really, it sounds to me like you should be able to set aside a small sum of money every month and create your own savings buffer to cover these situations.

Answer 6

You need to know that the loan will cost you additional money every month. You need to know how you are going to pay that overhead in addition to what you're already paying.

The best answer is to reduce your spending to build up a reserve you feel comfortable with, and then NOT spend that reserve except in emergencies.

If you need a short-term answer, I'd suggest borrowing from relatives. Failing that, I'd suggest talking to a bank about establishing a line of credit but NOT drawing upon it until and unless you have Absolutely No Other Choice. That gives you a preapproved option when you need it at (usually) a much, much better rate than credit cards... without costing you anything until and unless you actually do need the money, and (if you don't have it set up to kick in automatically on overdrafts) without making it so easy to get to that you're tempted to use it before you must.