Some periods in our lives can prove to be financially difficult.
As humans, we can all understand that when it rains, it pours. With numerous other debts to repay all at once you might need some financial help.
If you need a financial breather, then personal loans are the best solution
Personal loans can be used to finance a variety of matters including weddings, holidays, medical emergencies or even to pay off other debts.
Currently, total personal loan debt in the UK amounts to a total of £62 billion spread across four main different types of personal loan options, namely:
- Fixed- and Variable-rate Loans
- Secured Personal Loans
- Unsecured Personal Loans
- Debt Consolidation Loans
The loan that you decide to choose depends greatly on your financial circumstances and your personal needs. But with so many different personal loan options, how does an individual know if they are choosing the correct loan option?
The first step is to understand the different types of personal loans available and, from there, these six factors to consider before choosing the correct personal loan for you will assist you in making your decision.
Unsecured personal loans
An unsecured personal loan is as its name suggests. They do not require any assets to be used as collateral. This also means that your home, vehicle and other belongings are safe in the case of loan default.
While unsecured loans are approved faster than their secured counterparts, borrowers do not have access to large borrowing amounts. Unsecured loans also usually have shorter loan periods and higher interest rates. This is because the lenders are taking an increased risk to lend to the individual.
Secured personal loans
Unlike the unsecured loan, a personal loan does require any asset as collateral before you will be allowed to borrow money. But, because you are providing collateral, the lender is willing to borrow large sums of money at better rates and longer loan periods.
Secured loans are also the better option should you find yourself in a poor credit position. By providing an asset, the lender has a lower risk lending to you. Should you find yourself in a position where you are unable to repay the loan, the asset will be sold, and the balance of the loan taken from the total sale.
Fixed-rate and variable-rate loans
As the name suggests, personal loans can either be classified as having a fixed-rate or a variable rate. With a fixed-rate loan, the interest rate will remain the same throughout the loan period regardless of changes in the interest rate during the duration of the loan.
Whereas, a variable-rate loan, has an interest rate that changes throughout the loan period. This means that your monthly repayments will differ according to the fluctuations in the interest rate.
Debt consolidation loans
If you find yourself overburdened by multiple credit cards, store cards, and small loans then the answer you are looking for is a debt consolidation loan. This loan allows you to repay all of your smaller debts in full and focus on repaying a single loan amount instead.
While this may seem more expensive, individuals can save money on various fees, monthly charges, and interest that are accumulated across the other debts. Once this is taken into consideration, the debt consolidation loan saves the borrower money.
Factors to consider before choosing a personal loan
The personal loan option that an individual borrower chooses is highly dependent on that borrower and their personal needs. No individual is the same which is why the essence falls on the borrower to make an informed decision.
The following factors should be taken into consideration when assessing the loan options:
1. What are my loan needs?
Before applying for a personal loan, you need to completely understand what your motives are. Taking on any type of debt is not a decision that should be taken lightly as debt does not disappear overnight.
However, some situations render individuals without any other choice. If you need a loan to handle some debt that has gotten out of hand you will most likely be looking at a debt consolidation loan. However, if you need some small cash to repair your car then an unsecured loan might be up your alley.
Inform yourself of the different loan characteristics and decide which loan is best suited to your circumstances. If you are having trouble deciding, contact a lender or broker and they will be able to give you some advice.
2. Take some interest in the interest rates
The interest rate of your loan is the factor that will have the most influence over your loan repayment over the loan duration. When assessing loans, it would be wise to choose the loan that has the lowest interest rate. This means that interest will accrue significantly slower.
Unfortunately, if you have a poor credit score you will have a higher interest rate and vice versa for those with good credit scores. Deciding to go for a fixed- or variable-rate loan also depends on whether you would like to make steady repayments or rather repay the loan faster.
With a fixed-rate, you will have more stability and a better time budgeting. This is the better option for those with less-than-perfect credit. However, if you would like to repay your loan faster a variable-rate might be more suited.
When deciding if you should take out a debt consolidation loan, it is important to ensure that the interest rate on the debt consolidation loan is lower than the rates of the debt you want to consolidate otherwise there is no point.
3. Early and additional repayments
Many lenders charge a fee for making additional repayments or early repayments. Many people prefer to make additional repayments or repay the loan early via a lump sum, to reduce the amount of interest paid.
When taking a variable-rate option this is usually not a problem, but many fixed-rate options do not allow for early or additional repayments without first paying a fee. This is something that will have to be discussed with the chosen lender.
4. Loan eligibility criteria and requirements
Different lenders have different requirements that need to be fulfilled before they agree to lend to an individual. For example, certain lenders do not lend to those with bad credit at all. If you find yourself in a bad credit situation, you will need to locate a bad credit lender.
Before applying to a lender, read through their criteria to ensure that you will stand a chance for your application to be accepted. However, the basic requirements are usually that you are a UK citizen with a full-time job, over the age of eighteen and not currently bankrupt.
5. Loan amounts and repayment flexibility
Each lender has their set loan amounts and, depending on if you would like to borrow a small or large sum of money, you will need to shop around for a lender that meets your needs.
Some lenders are also more flexible with the loan repayments allowing the borrower to decide the loan term as well as the repayment frequency differing from weekly, fortnightly and monthly.
6. Where to find the right lender
Finding the right lender to borrow from can be quite a difficult task, especially since there are so many different lenders and financial institutions in the UK. The best place to start is on loan comparison sites where various lenders are compared based on their rates, terms, loan amounts, and charges.
If these websites still cannot solve your problem, then consider contacting a broker. Brokers often offer their services for free and, in exchange, will locate the most suitable lender based on your personal needs and preferences.