Personal Loans
Vital Tips You Should Take Into Consideration When Applying For A Personal Loan
If you are in need of obtaining additional money quickly, then your main choices are using a credit card or obtaining a personal loan from a bank, building society or from a specialist loan company. For short term borrowing credit cards can be useful, but for longer term borrowing a loan may seem to be the best option. Whenever you take out a loan or credit agreement, your prospective lender will assess your personal circumstances and decide whether to offer to lend you the funds you require subject to its repayment with added interest being paid.
There are two main types of personal loans: secured and unsecured.
An unsecured loan is where the loan repayments are not tied to any additional guarantee except the loan agreement. Should you default on payments you could damage your credit rating or become blacklisted which may lead to future difficulties in taking out a new credit card, a mortgage, additional loans, or obtaining interest-free deals in shops.
A secured loan (often called homeowner loans) is one where you provide collateral which will guarantee the repayment of the loan should you find yourself in unexpected difficulties. This type of loan is usually secured against your house, which means that if you cannot meet the loan repayment schedule, you may be required to sell your house in order to pay back the money borrowed. Secured loans are generally seen as less of a risk by lenders, as they are likely more to recover their money if things go wrong. This means that the amount that can be borrowed is usually higher, and the rates offered are often much better than would be obtained on an unsecured loan.
If you default on a secured loan, your lender can force you to sell the asset to pay off your debt. Car loans are also secured loans, with the lender using the vehicle you are buying as security for the loan.
Depending on the result of a financial health check (completed by the lender), you may be offered, on average, up to $25,000 to be paid back over a period of between 6 months to 10 years. The actual amount that you can borrow and the interest rate charged will depend on factors such as your past credit record, amount requested, duration of loan, purpose of the loan, whether the amount borrowed is secured or unsecured, and acceptance of various terms and conditions applied by the lender.
Interest rates - Another factor to bear in mind when looking for any financial product is to ensure you are comparing like-with-like. Different lenders calculate the annual percentage rate (APR) in different ways. Don't simply look at the monthly interest rates - these are frequently lower than the annual rate and can make you think you have got a much better deal than you have in reality.
The APR (annual percentage rate) on a loan is the amount you will pay in interest each year. Most adverts for loans tend to quote a “typical APR”; you will not necessarily get the same rate of interest when you apply.
Unless you choose a lender with a “one-size-fits-all” interest rate, factors including how much you want to borrow, how long you want to borrow it for and your personal and financial circumstances will all have an influence on how much you pay.
Interest rates can be fixed or variable, and it is important to know which you are signing up for. A fixed rate will remain the same for the term of the loan, which means your monthly repayments will remain the same.
A variable rate will be subject to change. While this is good news when rates are falling, it can be worrying if rates go up and you need to find more money than expected to make your repayments.
If you are thinking about taking out a personal loan, then there are a number of things you should be aware of before signing anything. Although personal loans can be extremely useful for paying off debts or improving your cash flow, if you make mistakes then you can end up in financial trouble. If you know about these common personal loan mistakes and how to avoid them then you will find the right loan for your needs.
Repaying your loan - Most loans are repaid in monthly instalments & usually by direct debit - over a period agreed before you get the money. The lender will tell you how much you need to pay each month when it agrees the loan.
The repayment period is usually fixed and you will have to pay a redemption penalty - for example, two months’ interest - if you want to pay it off sooner. The longer the repayment period, the more interest you will be paying, so go for the shortest you can manage.
Flexible loans, which let you borrow and pay back at will, are becoming more common, but the interest rate charged is often significantly higher.
If you miss a payment the lender will record the default on your credit file. Any new lender may not be put off by one or two missed payments, but if you have missed several you may struggle to get credit elsewhere.
Getting too many quotes - Although shopping around for your loan is important, you should also remember not to get too many detailed quotes from lenders. Every time you apply for a loan or get a detailed quote, the lender in question has to pull up your credit report. If you credit report is continuously being looked at or loan applications turned down, then your credit rating will suffer. This will affect your chances of getting the loan that you want. Shop around as much as you want to compare prices and interest rates, but do not make applications until you are sure the lender is the right one for you.
Hiding financial problems - It may be tempting when applying for a loan to hide your past financial problems, or to stretch the truth when it comes to your earnings. If you do this it is likely to end up with you being refused for a loan, or even being in trouble for giving false information. If you have had credit problems in the past and have recovered from them, this is often seen as a positive sign because lenders can see that you honour your commitments and are able to get yourself out of problems. If you are honest then you will get more competitive terms and will not get yourself into legal trouble.
Borrowing more than you can repay - One of the most common mistakes people make is to borrow more than they can repay. This is especially true if you get a secured loan, because the lender is less concerned if you pay or not as they have some collateral in place. You need to be honest with yourself and work out a strict budget. Only agree to a loan that you know you can pay back not only now but when times are hard. If you do this then your loan will help you improve your financial status rather than to make your problems worse.
Getting into difficulty - Sometimes things go wrong and it is difficult to meet your monthly repayments. If this happens to you, do not ignore letters arriving through your front door.
The best course of action is to get in touch with your lender immediately. Banks and building societies are often willing to help and might offer to freeze the loan temporarily or extend the repayment period.
Their ultimate aim is to recoup their money, but it is usually more advantageous, including cheaper, for them to reschedule your repayments than to take action against you.
It is particularly important to be upfront with your lender if you have a loan secured on your house or another asset, because if things go wrong you may have to sell up to pay back the loan.
Believing in promotional advertising - When taking out loans, too many people focus on the promotional interest rates that companies offer. Although these interest rates seem like an amazing deal, you rarely end up being eligible for such a low rate. Even if you can get a very low rate, there are often hidden charges to consider that are not mentioned. Instead of looking at APR, look at how much you have to repay in total, as this is the more important figure. If you go to a responsible lender then their fees and charges should be transparent and clear, and you will get a deal that will suit your needs and not leave you paying more than you should be.
Remember to check all the details and small print of a loan before taking out any type of financial agreement to ensure you understand what is required of you and that the loan meets your requirements. Bear in mind that in general, the shorter the repayment period of a loan, the less interest that you will be required to pay.
Should you get rejected for a loan, it is useful to know that they (i.e. the bank or lender) are obliged to explain the reasons for doing so. Any time that you are rejected you should also run a check on your credit history to make sure no mistakes have been made, and you can request that a notification of correction is made to prevent the same thing occurring in the future.
