Personal loans are designed to give individuals a rapid influx of cash when times are hard. They offer people a way to acquire the necessary capital to carry out some home renovations or to pay off debts and raise their credit score.
Of course, as with any other loan, taking out a personal loan will mean you take on some new debt. As such, it is important that you understand what you are getting into beforehand, what the terms of the loan are, and whether you have a realistic prospect of being able to come out the other side in a better position financially.
Below is a short and focused guide to exactly what you need to know before you take out a personal loan.
Sometimes, there are purchases you want to make but cannot afford to put on a credit card. Taking out a personal loan can be a more cost-effective way of getting the necessary money together.
Even if your credit rating is excellent, the best interest rate you’re likely to see is around 10%. For those whose credit scores aren’t as good, the rates can go up to 20%. By contrast, personal loans usually have an interest rate below 10% for those with excellent credit scores.
It is very important to read all the terms and conditions of a loan before taking one out. There are now a number of different services that process personal loans, payday loans, and other types of relatively small loans with a rapid turnaround time. However, whenever possible, you should speak to an actual person and make sure that you go through the terms of the loan with them, paying particular attention to what fees will be applied.
Most people have heard of APR and will know the term interest rates, but not everyone knows what these terms are. In fact, many of us have no reason to think about these terms in any depth until we encounter them when applying for loans. The interest rate tells you what the cost of the loan itself will be, but does not take into account any fees that are to be applied. The APR, on the other hand, takes in to account any additional fees that will be applied, as well as the cost of borrowing after applying the interest rate.
It is important to understand the costs of your loan up front so that you can plan your financials to ensure you are able to meet payments. Some lenders will offer tools on their websites for potential applicants to assess what kind of loan they can expect to obtain and how much it will cost them overall. You can click here to see an example of a loan calculator which allows applicants to establish how much they can borrow based on their monthly income and outgoings.
When someone takes out a loan for a car or a house, they are usually required to put up collateral. Collateral is a physical object of value that the lender will take possession of if the applicant is unable to meet their repayment obligations.
For this reason, the interest rates on collateralised debts tend to be lower than their non-collateralised counterparts. Personal loans fall into this category and so you don’t have to risk your home or your livelihood to take out the loan. Lenders interpret this as an increased risk on their part, hence the higher interest rates, but so long as you plan ahead and ensure your finances are solid, you should have no trouble paying back a personal loan.
In a similar fashion to credit card loans and student loans, when an individual takes out a personal loan, it is usually reported to credit agencies and will, therefore, show on a credit check. It is important to consider this if you are likely to make any applications in the near future that will depend on a credit check.
However, it is also true that if you meet all of your repayment obligations it can contribute positively to your credit score - another reason why carefully planning your finances ahead of time is essential.
Before you commit to taking out a loan, it is essential to establish exactly how much it will cost you after the interest rate and relevant fees are applied. Make sure that you understand what your repayment obligations are and compare this against your expected monthly income and outgoings. You should only go through with the loan if you are completely certain of your ability to meet these obligations.
A personal loan offers individuals a rapid cash injection and can be used for different purposes, from helping to settle other outstanding debts to funding home renovation projects. Make sure that you do your research beforehand and that you are confident in your ability to repay the loan on time.