How to get the most out of your personal loan
Do you need extra finances for small repairs around the house, a new piece of equipment or a well-deserved holiday? Are you wondering which lender to go with and what loan product to go for?
Finding the right loan and making the most of it requires that you examine your own needs and preferences. While every loan will provide you with a sum of borrowed money, each lender will have different terms and repayment obligations, so not every loan will suit your particular financial circumstance.
Don’t be put off by credit history myths
Some potential borrowers are put off from applying for a loan because they are worried about being turned down. They fear a rejection will automatically put off other lenders and that somehow they will be relegated to a blacklist. However, these credit history myths are simply untrue, so if you see a loan product that is perfect for your needs, don’t hold off applying just because you don’t want to be rejected.
Find a loan repayment schedule to suit you
Arguably the most important aspect you need to feel comfortable with is the repayment schedule of a loan. To make sure you don’t commit to repayments that will put you under a lot of financial stress, you need to use a budget planner (free one here) to understand how much you can realistically afford to repay each month before taking out a loan.
Additionally, find out whether the loan you are interested in allows early repayments. Although making early repayments will save you money as interest is normally only charged for the days you borrow, some lenders will impose a penalty fee against these extra payments.
For a flexible lender offering free early repayments, and look at their customer service rating to ensure they have a good reputation. Wonga.com state on their website that 9 out of 10 customers are happy to recommend their services to a friend. Many other reputable lenders will also state their customer rating – don’t be afraid to compare and ask friends and family their experiences, too.
Secured vs unsecured loans
Loans fall into two general categories – secured and unsecured.
A secured loan is one that has been taken out against a property. Lenders face fewer risks with this type of loan because in the event of a default, they can take over the property to recover their capital. Since they face fewer risks, lenders are willing to charge less interest on secured loans.
Although secured loans might be cheaper to finance for borrowers, they also take on greater risks – that of losing their property in the event of a default or missed payment. As this type of loan is also costly to arrange, they only tend to be taken out when a large sum is needed, say for a home renovation project or a wedding.
Unsecured loans on the other hand, are personal loans that have not been borrowed against an asset. The consequence of a missed payment for a borrower is limited to a bad mark on their credit history. Personal loans are quick to arrange and often involve minimal fees.
Lenders tend to charge more interest for this type of borrowing because they face more risks. For this reason, unsecured loans tend to be used when a smaller sum is needed, say if you just need a few hundred pounds for a new laptop or extra money for a holiday.
Personal loans vs credit cards and overdrafts
Credit cards and overdrafts are other types of unsecured personal borrowing. They tend to be used by young people with less earning capacity. The main difference between a personal loan and a credit card or overdraft is that a personal loan requires the borrower to stick to a specific repayment schedule, while an overdraft or credit card will only demand minimal amounts of interest to be repaid.
A clear repayment schedule means that a personal loan will be repaid by the end of the loan term, while borrowing on a credit card or overdraft can result in a debt that carries on indefinitely. There is a great risk of your debt snowballing with credit cards and overdrafts as it takes financial discipline not to borrow more and more.
Whatever loan product you decide on, make sure it matches your financial circumstances and that you borrow only what you can afford to repay each month. Build a strong financial profile and you will be rewarded with cheaper and better deals in future.
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