How to choose a personal loan
Are you considering taking out a personal loan? Perhaps you need to finance renovations at home, or you’re helping a child through university. Make sure you know exactly what type of finance you’re looking for with this guide to choosing a loan.
There are many things to consider before taking out a personal loan, so thoroughly researching your options is a good idea. With a growing number of challenger banks and other alternative lenders joining the marketplace alongside high street banks, there is more choice than ever.
Below we take a look at the types of loans available and the ways in which you can maximise your chances of finding the best deals.
- Home improvements
- Buying a car
- Making a sizeable purchase without using a credit card
- To meet unplanned expenses, such as healthcare needs or travel expenses
- To pay for an expensive event, such as a holiday or a wedding
- To consolidate other debts
What types of personal loan are available?
Secured vs unsecured
Borrowers can usually only access around £25,000 through personal loans, or ‘unsecured loans’. This type of loan will usually be repaid over a pre-agreed timeframe and will not be secured against assets. If you fail to keep up with repayments, you can’t lose a home but you will see your credit rating plummet.
With a growing number of challenger banks and other alternative lenders joining the marketplace alongside high street banks, there is more choice than ever.
Personal loans allow you to set a monthly repayment schedule that you can afford and repayments will be predictable alongside interest rates. The general rule here is that the longer you take to repay the loan, the more you will repay in total.
A secured loan is a loan that is secured against an asset, usually a property. When property is used as the security, the loans are sometimes also known as homeowner loans, second charge loans or second charge mortgages.
Secured lending against property, depending on your income, affordability and personal circumstances, can potentially allow you to borrow much higher values than personal unsecured loans.
Other types of credit
- Personal loans from alternative providers: New challenger banks are popping up online and, in some cases, on our high streets, all the time. They are extremely keen to lure new customers away from the traditional banks and are offering some great interest rates on loans as a result
- Short-term loans: This type of loan is where you can borrow lower amounts, typically up to £1000, at a high interest rate, for a period of a month to a year. If you need to meet a short-term expense and are certain you can repay the full amount very quickly then this type of loan may be appropriate for your needs.
- Payday loans: Payday loans offer customers the chance to borrow small amounts until their next pay day. The interest rate is high and should only be used when you are completely confident you can meet the repayments.
- Overdrafts: An overdraft on your bank account can be a handy way to immediately access some extra cash every now and then. If you already have an overdraft, you can contact your bank to see if they will extend your limit if you need to borrow more money or find yourself hitting the limit part way through the month.
- Car finance deals: If you need cash to pay for a new set of wheels you can often access a loan specifically for that purpose from a finance provider. Rates on car finance are often reasonable for those who have a decent credit history and provide various forms of lending using the vehicle as security.
What should I consider before choosing loan?
Thorough research can help to ensure that you know your options and that you apply for the type of loan that best fits your financial needs.
- Representative APR is used to show you what at least 50% of borrowers achieved with a lender. This means you could be charged a higher APR.
- Find more out about Total Amount Repayable or TAP for a clearer idea of the borrowing.
- Don’t borrow more than you need to.
- Your credit rating could suffer if you make unsuccessful loan applications.
- Does the loan have a fixed or variable interest rate?
- Some loans have early repayment penalties.
- Does the loan charge an arrangement fee?
- Traditional lenders won’t usually lend less than £1,000 or for periods of less than a year.
Finally, the banking sector is rapidly changing and this means there’s more choice for consumers than ever before. However, this also means that there are a lot of options and a lot of information to sift through to find the right loan for you.
Thorough research can help you to ensure that you know your options and that you apply for the type of loan that fits your financial needs perfectly.
How can I increase my chances for getting accepted?
You can improve your chances of being accepted for loans if you get everything you need to apply in order before you approach a potential lender.
- Check your credit record. There are now a number of services offering free credit checks, which won’t impact your score and will help you understand the loan rates that you are likely to be offered.
- Consider how much you can afford to repay each month and for how long. Examine your finances before speaking to a lender to ensure you are confident of the terms you are seeking for your loan.
- Get your personal details in order. Everything from past address information, to moving dates – lenders use these details to check your credit history.
- Make sure you have your financial details to hand. Banks will ask you about your living costs in order to work out how affordable a loan is for you so you might need to show monthly outgoings and income.
- Consider your reasons for taking out the loan in the first place. Although, in theory, you can spend your loan on anything, banks will often ask how you plan to spend the money, so have a confident answer ready.
Caroline Ramsey is a content creator who specialises in personal finance. More than a decade of working in editorial teams, she offers highly tailored content covering a number of topics. Read more