When used sensibly and appropriately, loans can be a simple and efficient source of credit. Most loan borrowers have a lot of credit options to choose from, but these options narrow down when you’re a first-time borrower.
First-time borrowers have poor credit scores similar to someone with bad credit. If you’re borrowing credit for the first time, you may have a “thin credit file”, which simply means you don’t have enough credit history for a lender to refer to.
As a first-time borrower, it’s also important to practice caution, as your vulnerability or lack of borrowing experience can make you easy prey for predatory lenders. That’s not all! There are a number of different things you need to keep in mind as you consider making your first loan application.
Let’s take a deeper look.
1. Maintaining Financial Health
It’s important to have a thorough understanding of your financial standing before you take out a loan. Given that all lending organisations and individuals seek out responsible financial behaviour, now might be a good time to check your credit score and understand your borrowing limit.
Get a free credit report from a credit reference agency (CRA) or use other free resources like annualcredit. This is especially relevant if you are a first-time borrower, as it helps in ensuring your credit reports stay error-free.
It’s likely that your credit report shows you a fairly low score since you’re a first-time borrower. This means that your options for a loan are limited, and you may be dealing with reduced loan amounts. Maintaining good financial habits over time can help you gain credibility and reliability, as well as access to better loan options.
2. Knowing Your Credit Options
From mortgages for a property purchase and student loans for a college degree to personal loans for a foreign holiday or payday loans for a short-term credit option, there’s a wide range of options for loans to choose from.
However, these can come with low amounts for a first-time borrower. It is wise to consider building up your credit with a credit builder loan before you apply for a personal loan.
3. Due Diligence on Lenders
Most credible lenders offer loans with reasonable interest rates and ensure transparency in loan agreements. They’d have a physical address to verify and must be authorised by the Financial Conduct Authority (FCA) to begin with.
But if the lender is not trustworthy, taking their credibility at face value could cause problems. In certain cases, lenders who were granted FCA authorisation were also found to have violated ethical lending standards. It is therefore essential to do your due diligence.
Look for misleading advertisements such as partnerships with leading banks, differences in lending rates as advertised & on the loan document, legal jargon or unreasonable terms & conditions.
Also, examine the fine print for words like prepayment fee, arrangement fee, late fee, etc. They’re just another way of making you pay more for your loan and should be considered potential red flags.
Spend some time researching your lenders to avoid potential regrets later. Ask for recommendations from family & friends or look for lenders that have a good online reputation accompanied by reviews.
4. Budget for Efficiency
Making a budget before taking out a loan could be a smart move to consider. If you miss your payments, it can make you a less trustworthy borrower and may restrict your access to credit in the future. Budgeting can help you achieve your financial goals while also improving your ability to repay.
Effective budgeting alone can sometimes help you manage your money more effectively. The key is to reduce wasteful spending, save for emergencies, and reduce expenses wherever possible. This will help you develop financial discipline & boost your long-term financial health.
Even though one loan might not have a significant impact on your finances, taking out loans frequently might not be a smart move. Budgeting ahead of your loan application can help you reduce the amount you borrow too.
5. Freely Use Financial Advice
The application process for a loan is fairly simple when dealing with reputable lending organisations and legal lenders. In case you’re feeling confused, need more information or simply want to air your concerns, you can choose to get financial advice.
There is plenty of financial advice available online from leading experts. You could also consider using legal glossaries to cross-check your loan document for additional clarification.
If you’re still feeling unsure and need consultation, you can approach organisations like ‘StepChange’ or ‘Citizen’s Advice’ for free financial advice. They can help explore your credit options and determine the best course of action for you.
Conclusion
Taking a loan for the first time doesn’t have to feel like a nerve-wracking experience. Try to gather as much information as you possibly can and ask questions. Building up your credit with a credit builder loan is a good idea to test your own capacity to responsibly make repayments. We hope the above-discussed pointers help you as a first-time borrower to make the best financial choices for you.
