None of us like borrowing money, but every now and then the decision slips out of your hands. Home finances are often tough to manage, and occasionally you may run into situations when you need a loan. Getting a personal loan isn’t as easy as a lot of material makes it out to be. There are a lot of different factors which pool into the process. You need to understand these in order to give yourself the best possible chance of getting the loan you need. Here, we’ve put together a guide to your personal loan.
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First of all, you need to understand a few key features of a personal loan. In simple terms, a personal loan is a loan made by a bank or other entity which isn’t secured by any asset. You may have heard them referred to as “unsecured” loans before. With other kinds of loans, some form of asset, like your home or other property, will be put down as security. Like with any form of borrowing, there are benefits and drawbacks.
There are a few features of a personal loan which makes them more appealing than the alternatives. Usually, you’re able to borrow more through a personal loan than you’re able to on a credit card. Credit cards are the preferred method of borrowing for most people, but are far more limited than others. With a personal loan, there’s also the advantage of fixed monthly payments. When you know the exact figure you’ll have to pay at the end of every month, it becomes much easier to plan ahead and manage your finances. Usually, these kinds of loans also have fixed interest rates. There are a few exceptions out there though, so don’t take it as a given! Typically, there’s also much more flexibility in how long you take to repay the loan. In most cases though, this isn’t a massive advantage in the long run. Bear in mind that the time it takes you to pay up will impact the interest rate on your loan. One last advantage is that you have the freedom to consolidate a few different debts into a single personal loan. Again, be careful about this. Consolidation may reduce your monthly repayment figure, but it may also stretch out the time it takes you to wipe the debt. Check out this Money Supermarket guide on debt consolidation for more info.
With these kinds of advantages, you can see why a lot of people turn to personal loans to solve their financial issues. However, there are certain cons tied to personal loans you should also be aware of. If you’re afraid of high interest rates, then there might be other options which are better for you. People who take out personal loans often struggle with much higher rates of interest. This is particularly prevalent when they take out small amounts of money. There’s another side to this issue. Because interest rates decrease the more you take out, some people will make snap decisions to borrow far more than they need. Furthermore, some loans carry a charge for early repayment or overpaying.
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Before contacting a single bank or lender about their loans, be sure to take a few things into consideration. First of all, you might not actually get the interest rate advertised in big, flashy lettering! Here, I’m referring to the representative APR (annual percentage rate). While banks and lenders wave this around like a guarantee, you may not qualify for it. In fact, most money lenders only offer their representative APR to around half of their customers. If your credit rating isn’t ideal, you’ll probably still be accepted. However, you may have to battle with a much higher rate of interest than the alluring rate you thought you’d get. However, this can be helped by tidying up your credit report. Depending on your personal circumstances, this might be easier said than done. However, most people can take steps to make their credit report look a little better. Depending on the loan you’re going for and other long-term plans, you might want to hire some outside help to improve your credit rating. See this Lexington Law credit repair review for one idea.
You also need to look out for variable interest rates. These are uncommon, but still possible within personal loans. This is especially important if you feel you can only just afford regular repayments. Another big thing to be wary of is payment protection insurance (PPI). This is insurance designed to protect the borrower, in case they can’t keep up with agreed payments. Sounds like a good thing, right? Unfortunately, a lot of lenders mis-sell this kind of insurance using high-pressure selling tactics. Make sure you read into it before buying anything. A lot of policies are found to offer inadequate protection, or none at all when the holders needed it. If you do want PPI, then there’s probably a better option than buying it from the lender.
When you actually come to securing your loan, you would’ve done the bulk of the work already. My advice at this stage is to shop around. It’s very rare that the first rate your bank or building society offers you is going to be the best available. Look for the cheapest possible APR you can find. Although you can end up paying more, the advertised APR is usually a pretty good way to judge what your interest is going to be like. There are many comparison websites where you can search using your credit rating. This can be a big help when you’re trying to understand the deals available to you. If you have a good credit rating, then consider peer to peer loans. Often, these offer low interest rates, and can be used for smaller loans. On most comparison sites, these will be thrown in with the personal loans listings. As you delve deeper, you’ll start gaining a better understanding of the options open to you. Just make sure you read the fine print!