Whether you are considering a loan for home improvements, a car or to  set up or help expand your business you need to consider a number of factors to ensure that you are taking the correct options.  While individually the various elements of the checklist may seem very simple, put them together and they can answer many questions about your situation.

Some of the main factors to consider are :-

Amount Required

Many people fall into the trap of actually asking for too little money when looking for a new loan, something which can actually back fire on you further down the line.  If you do require further assistance at a later date, your bank (or other financial provider) may not be in a situation to help you – or your own circumstances may have changed.

As crazy as it may sound, you are actually better off asking for a little more than you think you need, just to give you that buffer zone and comfort.  If the “extra” is not required, you can always repay this part early as soon as it becomes clear it is not required.

Loan Rate

Do not just go with the first loan offer which you receive as you will not be able to tell if it is the most competitive in the market place. Too many people tend to stick with their bank or their long term financial adviser, when sometimes it may actually be more beneficial to look around and see what is on offer in the market.

Even if you prefer to go with your long term adviser you could always ask them to match the best rate on offer elsewhere as they would probably be desperate to keep your business.

Ability To Repay

You really need to be honest with yourself and the bank when applying  for a loan.  Be honest and up front about why you need the loan, your income and your personal circumstances.  If a loan is approved based on incorrect information which was passed deliberately, this can in some situations be classed as unlawful and you could (at the very extreme) open yourself up to the possibility of criminal charges.

Before you even think about applying for a loan you need to clarify your situation how much you spend, your income and what you can actually afford to repay.  If you are not able to cover the loan which you need then you would only be adding more pressure to yourself by taking the loan out.  Caution is the watch word!

Terms

While we have already covered the interest rate element of loans, there are also other issues to consider such as the term (i.e. the length of the loan), payment details (do you only pay interest and the original capital at the end of the term, or do you repay a mixture of interest and capital from day one?) and charges and penalties for late payment or early repayment. 

These are very serious aspects which you need to be fully aware of before signing up to any loan. You need to know where you stand from day one, and what you liabilities are.

Collateral

Many US banks will ask for some kind of collateral for larger loans, e.g. your home when buying a property.  While not all companies will demand some kind of asset backing, you need to consider whether offering such a support might even help improve the interest charge on your loan (of even increase the chances of being approved for a loan).  By taking an asset backed loan you are reducing the risk to the lender, for which you may well be rewarded with a slightly lower interest rate, but increasing the risk for yourself.

Tax Situation

While this would not normally be relevant for more traditional home purchase loans, there may be tax implications for loans associated with a business.  If you are able to offset the cost of a business loan against the income from the business this is something which you need to know about.  When considering larger loans, and the potentially high interest payments, the offsetting of such expense against the profits of your business can be substantial.  Every dollar helps!

Variable Or Fixed Rate

While very often there will be an option for a variable or fixed loan agreement, the vast majority of people tend to take out a fixed rate loan, purely because they prefer to crystallize their long term commitments and know what they will be repaying each and every moth. 

If you choose the variable option then the rate can move higher or lower depending on the underlying interest rate at the time.  If you take a loan out when interest rates are relatively high, and starting to move lower, this can reduce your interest burden in the future but it can be a very risky gamble and one which can go horribly wrong.

Conclusion

Whether you are taking out a loan for home improvements, a new car or for business purposes you need to ensure that the terms and conditions are right for you.  However, more importantly you need to be sure that you can actually afford the loan in question, now and in the future. 

Many people fall into the trap of being scared of taking on debt and will try to cut corners to ensure they keep their loan amount down as low as possible.  Under financing a transaction can in many ways be worse than over financing, because while you take the initial hit of taking out a loan, you may well need to go back for a second tranche at some stage.  It is then that you may encounter problems with getting an extension to your original loan.

So in summary you need to know exactly how much is required, what you can afford to repay and see if there is a workable solution.  If your income does not support the kind of loan that you are looking for there is no point in chasing something which may never happen.  Financial prudence is essential and you need to be in total control of your finances at all time.