What Is a Personal Loan?
A personal loan, also known as an unsecured loan, is when you borrow a fixed amount from the back which you agree to pay back over a set period in agreed instalments. Varying amounts of interest will be charged on the amount depending on your specific agreement.
Personal loans are not secured against any asset. This means that if you miss payments, your creditor does not have a specific method of getting the money back, they will have to go through the same process as any other non-governmental creditor. However, this can nonetheless cause severe problems for you.
The Advantages of a Personal Loan
Personal Loans can be a sensible way of borrowing, provided everything is handled appropriately. We have outlined some of the benefits here:
- You can borrow more money than you would be able to with a credit card or payday loan etc.
- The amount you’ll be asked to pay back every month will be the same which means can make budgeting much easier.
- Interest rates are usually fixed, so there shouldn’t be any surprises, although check your specific agreement to make sure.
- How long you want to take the loan out for is up to you, giving you more control.
Personal loans are a ‘civilised’ way of lending. When you deal with a legitimate bank, there will be very few nasty surprises and charges, provided you keep to the terms of the agreement.
The Disadvantages of a Personal Loan
While some forms of borrowing are more dangerous than others, every method has its downsides. Here are some of the drawbacks of withdrawing a personal loan:
- Most unsecured loans come with an early repayment fine, meaning that if you try to pay off the loan early to avoid interest or stress, you will be charged.
- There isn’t much flexibility in terms of the repayment plan. If your circumstances change it is unlikely you’ll be able to amend your plan. However, this depends on your creditor.
- Because your loan is not secured against anything, interest rates tend to be quite high.
‘What Loan Should I Get?’
There is no real answer to this; there is no ‘best’ loan. However, there are a few questions you should ask yourself so that you can decide what is best for you.
The Interest Rate
The first thing to be aware of is that the advertised interest rate for a loan is more often than not different from what you are actually offered. The interest rate can be affected by:
- Your credit rating
- The type of loan
- How long you’ll be paying it back
Always ask for a quote before applying to make sure you know exactly how much you will be paying, not just what was on the advertisement.
Also, be aware that some loans come with interest rates that go up and down. If you’re going to take out a variable rate loan, and can only barely afford to make the repayments, then reconsider. The rates going up even slightly could make meeting the repayments very difficult or impossible.
If you value the simplicity of knowing exactly how much you’ll have to pay every month throughout the term, then opt for a fixed rate loan.
The longer you take out a loan, the lower the interest will be. However, since you’re paying it back for a more extended period of time, you’ll end up paying much more in interest in the long-run. It’s important to find a balance between speed and manageability when it comes to paying back a loan.
You should also consider how long you want to be tied down to a loan. It’s all well and good to take a loan out for a term of eight years, the repayments could be very manageable, but you have to decide whether you still want to be paying back almost a decade into the future.
Remember, there are countless loan companies and banks out there competing for your business. They will all offer different deals in an attempt to make sure you borrow from them and not someone else. Some of the offers are wildly different, with others they are almost identical.
Make sure that you shop around and don’t just take the first loan you think you’ll get accepted for. Finding a loan that works for you is incredibly important if you want to find something that you can pay back with relative ease.
If you take all of these elements into consideration and shop around for your loan, you’ll massively increase your chances of having a successful borrowing process. And remember, before you do anything, always ask yourself whether you really need the loan or if there is perhaps a viable alternative.
If you have found yourself in debt because of an unsecured loan or are thinking of applying for one in order to pay other debts, then call our team straight away. We can help to clear up your outstanding loan debt and can offer alternatives, like a debt solution, rather than letting you take out more debt to address other commitments.
Call 0800 808 5142, and we can get started as soon as possible.