There is little doubt that a personal loan could prove to be a viable option if you need money for a specific purpose or want to organise your finances and consolidate your borrowings, but it always pays to weigh up all your options before you sign on the dotted line.
Here is a look at some of the main features of a personal loan that you need to think about beforehand and some pointers on how to narrow down your options and pick the option that is best for you and your circumstances:
The issue of security
The majority of personal loans are offered on an unsecured basis and that means you can get the money you need without having to put an asset like your home or car on the line as collateral.
This is significant as you risk losing your asset if you fail to keep up the loan payments. It also allows you to get the money quickly if you don’t have to go through the process of filling out the added documentation that is associated with a loan secured against collateral.
The consequences of not repaying an unsecured loan are still potentially severe as you will incur extra fees and your credit rating will be affected, so always think carefully about affordability before you take out any type of personal loan
Look for a fixed term and rate
If you take out a loan with a variable interest rate that means the amount you have to repay could go up or down if the rate changes.
This can wreak havoc with your budgeting if you don’t know how much you are going to have to pay each month.
That is why it is much better to look for a personal loan that offers a fixed interest rate that remains the same for the duration of the loan. For example, if you take out a personal loan that is over 24 months you can budget your monthly finances knowing exactly how much you have to pay back and for how long.
The interest rate reflects the risk
You should expect to pay a higher rate of interest for an unsecured personal loan compared to a secured loan that requires you to provide collateral.
The interest rate you are charged will be a reflection of the perceived risk you are to the lender of not repaying the money.
Despite this, you can expect to find a personal loan interest rate that is competitive, especially if your borrowing profile and credit rating is good.
If you are in a good position to command a decent rate of interest because you are perceived to be a reasonable credit risk this should allow you to search out a deal that offers a reasonably low-interest rate.
It is not just about your credit score
Although the interest rate (APR) that you are charged will largely depend on your credit score and previous payment history there are some other factors that will come into play if you are going to command the lowest interest rate deal from a lender.
What lenders will also look at is your annual income and what your debt-to-income ratio currently is.
If you already have a high level of borrowings compared to the amount of money you earn this could have an impact on the rate you are charged, however, a good credit score is still the number one thing that controls what sort of interest rate the lender wants to charge you.
Work out how much you need to borrow
What you don’t want to do is take out a loan and then discover that the amount you have borrowed is insufficient for your needs, although you don’t want to borrow too much either.
A good point to remember is that you can borrow a small amount of money but you might find that the interest is slightly higher. This is simply because the lender wants to make the deal worth their while.
If you want to borrow $1,200, for example, you might find that the rate for borrowing $1,500 is lower. If that’s the case, it could be cheaper to borrow slightly more.
Work out how much you need and then shop around to see how rates vary between different borrowing bans.
Watch out for fees
You need to be aware that there can often be a number of different fees attached to your loan deal.
The lender might want to charge an application or administration fee and there might be charges for early repayment of the loan.
Check the paperwork for details of any fees before committing to the deal.
What do you need the money for?
The purpose of the loan could influence who offers you the best deal or agrees to lend you the money.
Although most personal loans are very flexible in terms of what you need the money for, you will find that some loan companies have stricter lending criteria than others.
Make sure you find a lender that is flexible with its lending criteria as you don’t want to apply for a loan where the purpose of your borrowing is not allowed.
The best suggestion to keep in mind when you are in the market is that it often pays to shop around rather than take the first deal that is offered to you.
Have a checklist of requirements and work out your finances beforehand, Then, it’s a simple case of aligning a deal to your needs that offers the best rates and terms.