Personal loans explored from all angles

When looking for ways to fund personal expenses, such as buying a car or paying for unexpected bills, one way to acquire the finance needed is through a personal loan. Personal loans are not always directly advertised as "personal loans". They could be advertised as car loans, home improvement loans, or even payday loans. So, if you are considering borrowing any kind of personal credit, whether it be from a bank or high street store, here is some additional information that could help you decide whether this is the right type of credit for you. Here we want to analyse personal loans ensuring that they have been explored from all angles.

What are personal loans?

Personal loans can take on many different characteristics. One major distinction that exists is between an unsecured and secured loan.

Personal loans are commonly associated with unsecured borrowing. Unsecured loans usually range anywhere between £1,000 and £25,000, although some lenders offer smaller denominations. Repayment terms tend to range from around thirty days to seven years, perhaps longer. The main difference between this and a secured form of borrowing is that the borrower does not have to provide an asset as a form of collateral to the lender, such as a charge on their home.


Man signing contract

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Secured loans could be more suitable for those wanting to borrow amounts over £25,000, with the main caveat being that the borrower must offset the larger borrowing sums with some form of collateral. These commonly take the form of either a property deed or car. In the scenario where you are unable to repay what you have borrowed, the asset put up for collateral can be repossessed by the lender. However, one advantage of a secured loan is that interest rates are typically lower than that of unsecured loans. This is because there is less risk for the lender as, in the event of non-repayment, they have secured the loan against an asset.

Personal loans can be useful in a range of circumstances. Common uses include:

  • medical expenses
  • education or tuition fees
  • weddings
  • holidays
  • buying a car
  • home renovations

Another instance in which a personal loan can be helpful is if you want to consolidate your debt. If you have several creditors, it could make things easier to streamline your debt repayments by taking out a personal loan and using it to pay off any outstanding debt. As a result, you will only have one monthly payment, namely that of the personal loan, which may make it easier to budget and stay in control of your finances.

There are several options when it comes to lenders who provide personal loans and they will all have slightly different lending terms. Therefore, it is important to consider all options available to you. The most common place to obtain personal finance are high street banks. However, the interest rates they apply may be higher than those of alternative lenders. Other institutions from which you can attain personal loans are building societies, post offices, online banks or lenders, as well as private banks. In recent years, even supermarkets have started to offer loans to their customers. Your ultimate borrowing decision depends on the amount of credit you need and the period over which you will be able to pay it back. Some factors, including how urgently you need the funds and what your current credit report looks like, could potentially limit the borrowing options available to you.

Advantages of personal loans

Several aspects of personal loans make them a useful tool in many situations. In a financial emergency, unsecured loans can often be granted faster than secured loans, as checks are more straight forward and they are accessible online or on the high street. This therefore can make unsecured loans suitable to cover any unexpected costs that may arise.

Depending on how much credit you require, a personal loan can be more useful than a credit card, as you may be able to borrow a larger sum. Furthermore, planning and budgeting for the repayment is often more straightforward than with other types of debt. This is because you will have a clearer projection as to how much you will be repaying and how long it will take to pay it off. Personal loans are also quite flexible as the borrower is often able to decide how much they want to borrow and over what time-frame. However, do keep in mind that these decisions are dependent on an individual customer's eligibility to obtain the product.

Disadvantages of personal loans

Despite the many positives of personal loans, or indeed with any form of borrowing, it is equally important to look at the downsides of these products. While they may be relatively straightforward to obtain, in comparison to other forms of secured credit, they can attract significantly higher interest rates. This might be the case where you do not have the best credit report. Lenders tend to charge for risk i.e. the riskier the loan (in terms of the loan being repaid or not) the more you have to pay in the form of interest. In addition to this, most banks do not offer loans under £1,000 or loans with a repayment period of less than twelve months. This might cause people to perhaps borrow more than they need.

Borrowing more than you need, or more than you can afford, can lead to difficulties with repayment in the long-run. This can be exacerbated when the extra money borrowed is spent. If you fail to make repayments it may leave a negative mark on your credit report, which affects your likelihood to be approved for credit in the future. Regular borrowing can also contribute towards detrimental spending habits and patterns and could result in the reliance of loans to finance day-to-day spending.

Considerations before taking out a personal loan

Before taking out a personal loan you should always consider whether you will be eligible. The specific requirements can vary between lenders. Possible criteria include full or part-time employment, UK residency status, and a minimum 18-year age threshold. Your personal circumstances do not just determine whether you will get a loan at all, but also how much and under which conditions. A number of factors are taken into consideration, including but not limited to, the information you provide as part of your initial application, your credit report and any data held by the lender. For example, if you have previously borrowed from a lender, they may consider your repayment history with them when making their final lending decision.

When you are looking for a suitable lender, you may base your decision solely on the interest rate that is being advertised. Be cautious of this, however, as what is advertised might not always be what you will get. If you have a lower credit score, your interest is likely to increase as you are profiled as a higher risk for the lender. Similarly, if your credit score is higher than average, you might be provided with a lower interest rate or a higher initial borrowing amount.

Apart from the interest you have to pay, there may be additional costs that you need to take into account when taking out a loan and considering whether or not it is affordable for you. Some lenders may apply an "arrangement" or "processing" fee, which is a fee covering the initial set-up of the loan. However, this is not the case with all lenders so look at the specific terms of each offer. Furthermore, should you miss a payment there will likely be a fee for late repayment. Therefore, it is in your own interest to ensure the loan is affordable for you and that you will be able to pay the instalments on time.

As all matters related to your finances and personal details should be handled with care, it is crucial to ensure the lender you are planning to borrow from is credible. One major aspect to look out for is whether the lender is authorised by the Financial Conduct Authority (FCA). This information, along with other licences and registrations the lender holds, should be clearly identifiable on their website.

When starting the process of looking for a lender, the sheer number of options available in today's market can prove to be overwhelming. To make the process simpler, you can always opt to go via a broker instead. A broker acts as a "middle-man" between the lender and borrower, matching borrowers to prospective lenders when need be. Essentially, all one has to do is fill in an application and based on the information you provide, the broker will match you to a lender that they find suitable and forward your details on to them.

Here are some other things to be aware of before making your final decision:

If you have decided to take out a personal loan, there is a 14-day cooling-off period in which you can cancel the loan, should you change your mind about the borrowing decision you made. This period starts on either the day you signed the loan agreement, or on the day you are sent a copy of this agreement, whichever comes later. If you decide to withdraw, you have to repay your loan no later than 30 days after your withdrawal date and will only be charged interest for the period for which you actually had the loan.

Generally speaking, you can pay off your loan at any given point before the contractual repayment date, either all at once or by making partial payments towards the overall outstanding balance. You should be aware that some lenders charge a fee for early repayment. This can occur, for example, if you repay over £8,000 within a period of twelve months. It is best to check with your specific lender as to what their terms concerning early repayment are.

Don't forget that there are many alternatives to personal loans available, which may be more suitable to your financial needs. For example, you are able to make large purchases with a credit card and depending on the sum you need, this may be sufficient without the need to take out further credit. Another option could be peer-to-peer lending where there is no third party involved. This is where an individual who has savings or funds available lends this to another individual who then repays what they borrowed with interest.

Conclusion

A general rule to follow, with any form of borrowing, is to only borrow as much as you need. Make sure that the loan is affordable for yourself and that you are able to pay off the debt within a reasonable period of time. Always consider your personal circumstances and take the time to find a lender that best fits your needs. It is getting increasingly simple and accessible to find all the relevant information needed on the internet and to compare all options available to you as most lenders today offer online loans.