Considering taking out a loan
A loan may be necessary in some life situations. However, taking out a loan always involves a risk that you will not be able to repay it.
Loans can be divided into housing loans, student loans and consumer credits. Consumer credits include hire purchase agreements, credit cards and payday loans.
The costs, repayment periods and repayment terms of loans vary. It is important to compare loans carefully and be aware of your ability to repay them.
You should also consider whether you could save some or all of the money you need in advance instead of taking out a loan. This way you would need to pay less interest and other expenses. You should also be careful when entering into interest-free hire purchase agreements, as it is often difficult to predict your ability to pay for an entire year, for example.
Assess your solvency
When you sign a loan agreement, you commit to the repayment terms specified in it. This is why it is important that you assess your solvency (your ability to pay) before taking out a loan.
Before you take out a loan, add up your income and deduct your expenses from it. The difference between your income and your expenses will tell you whether you are solvent. If you are not solvent, you cannot increase your expenses unless you cut back on your existing ones. Be realistic when assessing your solvency.
Ask yourself the following questions
Can I repay the loan and have enough money to cover the costs of living? These costs include rent, electricity, food, telephone, medicines and commuting expenses.
Will I be able to repay the loan even if:
- my income fluctuates?
- I have a lot of other bills to pay?
- my income suddenly drops?
- the interest rate on the loan increases?
Compare loans
When comparing loans, pay particular attention to the interest rate and expenses. If they are too high for your ability to pay, the loan principal will decrease slowly. In some cases, the interests and expenses of a loan may add up to a higher amount than the original loan. In this case, you will use more money for paying the loan expenses than for repaying the actual loan.
Questions to consider
- What is the annual percentage rate of charge for the loan? The annual percentage rate of charge means the total costs of the loan per year. In addition to the interest rate, the annual percentage rate of charge also includes all other loan expenses and fees per year. The annual percentage rate of charge is a similar measure as the price per kilo when purchasing vegetables. It is always calculated according to the same formula.
- How much are the other loan expenses, such as loan establishment fees and account maintenance fees?
- How much will the loan really cost you during the entire loan repayment period?
- The total loan amount is the combined amount of the monthly repayments you will make during the entire loan repayment period. It is a good idea to compare the total loan amount to the original amount of the principal, in other words the amount that you will receive when you take out the loan.
- In what circumstances will the interest rate change? If the interest rate goes up or down, it will affect the amount of your monthly repayments.
- Can you pay off the loan at an accelerated pace? Read more about this on the website of the Finnish Competition and Consumer Authority.
- You should also find out whether it will be possible to take loan repayment holidays and how much they would cost. During a repayment holiday, you will only have to pay the interest on the loan, so the amount you need to pay is smaller, but the principal will not decline.
Selvitä myös etukäteen mahdollisuutesi lyhennysvapaisiin kuukausiin ja niiden kustannukset. Lyhennysvapaina kuukausina maksat vain lainan korkoja, joten maksuerä on pienempi, mutta laina ei lyhene.