Borrower Beware: 5 Things to Consider Before Taking Out a Bank Loan

Happy young couple signing agreement or contract. Health insurance document, bank loan, mortgage or apartment rental paper. Woman and man having meeting with salesman or real estate agent.

It’s estimated that one out of six Canadians is struggling with their household finances. Due to these financial stresses and concerns, many people consider taking out a bank loan.

While this can be a viable way to get the funds that are needed, it’s important to consider a few things before moving forward with this process. Keep reading to find out what you need to think about before accepting this loan.

1. Why Do You Need the Money? Is There Another Option?

It’s important to know why you need the money and this is the most critical factor to consider before taking out a loan. After all, borrowing money is a huge financial step, and it can either help or hurt you – based on how you manage it.

While you can take out bank loans for any purpose, consider whether or not it’s absolutely essential and if you have the funds to pay it back. If the loan isn’t absolutely essential, and it may put you in a financial bind in the future, then it probably isn’t worth it.

2. Get to Know Your Credit Score

Once you know why you want the loan and are confident you can repay it, you need to figure out what type of loan you can qualify for. This is where your credit score comes in.

Your credit history and credit score are the lifeblood of your financial health. If you don’t have credit – specifically good credit – then getting lower rates, lower payments, and more savings.

You need to get to know your credit rating before applying for a loan. If improvements are needed, make them before applying.

3. Get to Know the Specific Terms of Your Loan

Before you sign the papers for your new loan, be sure that you understand all the terms. This includes the annual percentage rate, the total cost that you are going to pay for the loan, and all the fees that may be applied to it.

Some of the specific fees that you need to find out about include:

  • The loan origination or loan processing fee
  • A failed payment fee
  • Prepayment penalties
  • Late payment fees

It’s also important to know how the interest is calculated on the loan that you are considering taking out. If interest is compounded, it is going to build on top of the existing interest while you try to pay off the loan.

This is usually calculated on a monthly or even a daily basis, so it is smart to make early or additional payments to reduce this cost.

Taking out a Bank Loan: Now You Know

If you are thinking about taking out a bank loan, then considering the information here is a must. This will ensure you are prepared for the loan that you ultimately receive.

If you are looking for more information about managing your finances, it’s a good idea to read some of our other informative blogs. For example, we have a blog on how to make money from Pinterest.