With the cost of living rising, wages stagnating, and more people under the threat of redundancy, there are more people applying for personal loans than ever before. Whether it’s from bank or building societies, or leading online loan services like iloans, this form of credit is becoming increasingly popular. Before an individual can apply for a personal loan, it’s important to know what to look out for to get the best deal. Here are some key tips to help get started.
Secured and unsecured personal loans
These two types of personal loan are very different. Unsecured loans are usually for people who want to loan a smaller amount – usually anywhere between £1,000 and £25,000.
Secured loans (for example, homeowners loans from Paragon Bank) are held against a property as the amount being borrowed is usually higher. This tends to range between £10,000 up to £100,000. The limit will depend on the amount of equity in the property. The debt is held against the home and if payments are not maintained, the house could be repossessed as a result.
Good credit scores add value
Before the lender agrees to loan the money, they will run checks to verify the borrower’s credit history. The better their credit history, the stronger the deal they can secure. The opposite is true if they do not have good credit, and they may be refused completely if the lender does not receive assurances they will not default on the loan.
The longer the loan, the more that is paid
Monthly repayments will depend on the amount borrowed and the length of time the contract lasts for. While paying back over a longer period will reduce the monthly instalments, it will also mean paying a higher amount of interest. A borrower can strike a better balance by working backwards from the maximum amount of money they can afford each month.
Borrower’s may pay more to repay the loan early
In many cases lenders will charge a penalty for the repayment of the loan before the agreed end date. Paying the money back earlier than expected means the lender will be missing out on the interest, which is effectively their profit for providing the loan. The more a person borrows, the larger the penalties will be for paying back the money early.
Repayment costs may vary
While unsecured loan repayment costs tend to be fixed, most secured loans have a variable rate which means repayment costs could become higher. Before signing any agreement individuals should always check what the risks are to avoid getting a nasty shock at a later date.
Borrowers do not have to take out PPI
Payment protection insurance (PPI) is an additional option that covers the loan repayments should the borrower fall sick, become unemployed or experience an accident. They are under no obligation to take this out, and if they do, it doesn’t have to be from the same lender. It can also be purchased after the loan has been taken out.
Watch out for any hidden fees
Potential borrowers should always read through the terms and conditions of the agreement before committing. This will tell them about all the charges included with the loan, including administration or arrangement fees, and there may also be penalties for any late payments.