A loan may seem like a simple product: you borrow an agreed amount from the bank and pay it back - plus interest - over time. But lending money can be a risky business, and there are pitfalls which we should all try to avoid. It's also important to ensure you find the best deal available to save you money in the long run.
Types Of Loans
Secured/Unsecured Loans
If you've never borrowed money before, the most typical choice for many lenders is a personal loan. This is often referred to as an unsecured loan in that it's not secured against any of your assets - such as a residential property. Other typical options secured loans (usually guaranteed against your home), and mortgage extensions. Your acceptance for these types of loans is dependent on your credit score (a calculation of the likelihood of you repaying the loan on time).
Credit Cards
Using a credit card is also a type of loan. You are paying for something that is temporarily being paid for by the credit card lender on the provision that you make repayments on a regular basis. If you repay the balance of the credit card each month then the borrowing is effectively free. If however you are unable to pay off the balance in full then interest and possibly charges will be applied to the outstanding amount.
Dubious Loans
Aside from these traditional methods of borrowing, if you need money very quickly, there are more dubious options such as payday loans and logbook loans. Payday loans are designed to tied you over for a short period of time while logbook loans are a form of secured loan as the money is borrowed against your car (the asset). A strong word of warning however, be aware that these types of loans can land you in financial difficulties due to ridiculously high interest rates and hidden fees. We do not recommend these types of loans unless you are 100% certain you can pay them back quickly and on time.
How Much Can I Borrow?
Every loan is different - it depends entirely on you, as the borrower. Lenders take into account your financial circumstances, including any existing debt you may have. As long as you're not suddenly going to be in unaffordable debt, you'll normally be eligible for up to £25,000 with a personal loan.
If you need more than this amount, you can apply for a secured loan. These offer substantially larger sums of money since there is less risk to the lender. If you have a poor credit history such as a track record of failing to meet expected repayments on previous loans, this will reflect in the amount offered to you by a lender. If you credit score is particularly bad, it may mean that you cannot borrow money at all.
A Loan, Credit Card or Overdraft?
Credit cards and overdrafts are more readily available than loans, but they tend to offer a smaller sum of credit to the borrower. However, if you only require a small amount of money for a short period (to help out until payday, for instance), these two may be better options for you.
Some credit cards and overdrafts offer 0% APR for an 'introductory period', meaning that, if you pay off the borrowed amount quickly, you could lend it for absolutely nothing. However, if you don't pay it off immediately, the interest rate with credit cards and overdrafts is usually far higher than with a loan - so only use this option if you're borrowing a small amount which you can feasibly pay back.
What is APR?
When you borrow money, you are required to pay back the full amount plus interest over time. APR stands for annual percentage rate and represents the percentage cost of interest on your specific loan. It also includes automatic fees associated with lending, meaning that the APR you see is the total including interest and additional fees for the loan.
Larger loans typically have lower APR's because it takes you longer to pay them back. As such, if you are in debt, it could be worthwhile consolidating these to ensure that you're paying the minimum interest rate possible.
Repaying A Loan
When borrowing money, always consider that you could end up in unexpected circumstances. For instance, you could be made redundant and left unable to repay your loan. In these scenarios, interest rates accrue, and your debt increases over time - while your credit score becomes damaged.
Before taking out a loan, explore whether income protection insurance is right for you. If you do find yourself in a tricky situation as a result of unemployment, illness or an accident, contact your lender as soon as possible. They may be able to offer you a temporary solution. Failing this, contact your local Citizens Advice Bureau or National Debtline for free and impartial advice on what to do.
Where To Find The Cheapest Personal Loans
You can walk into your local high street bank and start the application process, though we recommend shopping around online to try to find the best deal possible. If you decide a personal loan is the best option for you then there are a number of websites out there that compare the rates offered by different lenders. You can also compare personal loan rates HERE.
It’s always advisable to explore the different options out there when considering a personal loan, as you could save money by finding a lower interest rate and a better deal. When comparing offers, consider more than just the monthly repayment. Think about how much interest you’ll be paying in total, whether there are any application fees or penalty fee's if you miss a payment. Also consider what happens if you wish to repay the loan early. Some loans include penalties if they are repaid early. This can be an unwelcome surprise to many as its often hidden in the small print.
