You may be thinking of making a big purchase like a car or a fantastic holiday, considering some home improvements or simply want to reduce your outgoings by putting all of your debts into a single repayment. Whatever your situation, there is likely to be a personal loan out there which will fit your particular circumstances.
Whatever your situation, if you are looking for a personal loan it’s worth knowing how to shop around, what to look for and how your individual circumstances will affect what type of loan you’ll be eligible for and how much interest and fees you will end up paying.
There are literally hundreds of personal loan products on the market – those offered by the big banks and other mainstream lenders, other financial service providers including the major supermarkets and many others offered to people with less-than-perfect credit ratings in the so-called sub-prime market.
Deciding which personal loan is the right one for you is critical if you want to ensure that you are keeping your interest payments and other fees to a minimum. You will also need to be sure about exactly how much you want to borrow and how long you want to repay the loan if you are to secure the best deal you can.
Some lenders may ask you if you want to take out payment protection insurance. This may be an expensive option, potentially adding hundreds of pounds to the total amount that you will have to repay so you consider whether this is something that you really need. If you do decide to insure your loan repayments, then there is no obligation on you to go with the product offered by the lender – again, you can shop around to secure the best deal.
Do you actually need the money?
While low interest rates, long repayment schedules and large sums on offer make a personal loan a very appealing prospect, you might not actually be able to afford the total repayments. Consider whether you can fund your purchase through other means or whether you need it at all. Are you coping with your existing outgoings? Are you confident that your circumstances are not going to change during the lifetime of any personal loan?
Think about your household budget? Are there other areas where you can make some savings and then put the cash by to fund your new purchase without having to borrow more money?
Is a personal loan really what you need?
If you’re after a more substantial amount of money, then it might be worth considering another form of loan like a guarantor loan or a secured loan, particularly if you think you might have a poor credit rating. In general, the interest rates on secured loans are lower than for unsecured personal loans and the amount of time that you will have to repay the total amount will be longer.
If you need the loan to fund a new car purchase, you should also consider finance through the car dealership or getting a specific loan product for a car. These may not be cheaper than a personal loan but, again, it’s worth shopping around before taking the plunge.
Look at the interest rates
This is where your credit score becomes important. If you’ve had a poor history of financial management and missed a few payments or gone into arrears in the past, then it’s likely that you won’t have a perfect credit rating. People with lower credit ratings may struggle to get a personal loan and, if they do get offered one, are likely to face higher interest charges. But the market for sub-prime loans is large and growing all the time with stiff competition bringing rates down across the board.
If you’re unsure about your credit status, you can get your credit reports from the three main credit reference agencies – Experian, Equifax and CallCredit.
Do you have an existing account or loan?
While it’s definitely worth shopping around, if you have an existing loan or a credit card with a provider, it may be a good idea to contact them as well as checking out the wider market. Many financial providers are very keen on keeping their current customers for as long as possible and may offer preferential rates on new personal loans if you are already on their books.
Where can I get the best deal?
Personal loans come in all shapes and sizes no matter what your personal circumstances and if you’ve had difficulties in the past – short of bankruptcy – it’s likely that you will be able to find a lender willing to offer you the money you want. There are online financial comparison sites which will check your eligibility for loans without registering this as a search on your credit report and many other web-based financial organisations also have access to a large number of different loans. Shopping around doesn’t mean that you have to apply to each lender individually (and doing this would have a negative impact on your credit rating anyway) so use the tools that are available to find the best deal for you.
What to look out for
Always read the small print in the loan terms and conditions before you sign a credit agreement. There may be hidden fees and penalties that are not advertised on the website when you are shopping around. Also, make sure that the lender is clear about any early repayment penalties because if your circumstances change for the better later on, you may want to pay off the loan early to save yourself some interest. Some lenders will actively penalise people who pay off their loan early.
Article provided by independent finance content-writer Mike James – working alongside a selection of companies including technology-led finance broker Solution Loans, who were consulted over the information contained in this piece.