There are a number of reasons that people seek out personal loans. If you are considering taking out a personal loan, these are the questions you need to ask yourself first.
Do You Meet the Requirements?
The specific terms and stipulations of a loan will vary according to the type of loan and the provider you choose. However, there are also some all-encompassing rules which apply to any lender in the UK. These rules apply to lenders, not borrowers, but it is wise to be aware of them. Any lender who doesn’t adhere to these regulations, even if it is a seemingly minor transgression, should not be trusted to provide you with a loan. You don’t want to get into debt with a company that behaves too brazenly and unethically.
You must be over 18 years old and a resident of the UK in order to take out a loan in the UK. Anyone who provides you with a loan, despite you not satisfying these requirements, is breaking the law. Note that this applies to personal loans, businesses may borrow money in a number of ways. The amount you can borrow is decided by the lender themselves, usually on the basis of a credit report.
Looking for loan options online is the most efficient way of examining your options. Approaching individual lenders in person to discuss your options will be very time consuming. It is better to use online tools, which most lenders will provide, to quickly assess your eligibility.
Remember that being unsuccessful with one lender doesn’t necessarily mean you will be rejected by all lenders. For example, even if you have a relatively poor credit score, a guarantor loan might allow you to borrow anyway. A guarantor loan is one where a friend or family member essentially vouches for you and agrees to make repayments if you fail to. You can have a look at TrustTwo Guarantor Loans for an example of what these loans generally look like.
What Will You Do with the Loan?
Applying for a personal loan can be a great way of securing a much-needed cash injection. However, remember that nothing in life is free, your loan will need to be repaid with interest. It is therefore not a good idea to use a loan as a means of padding out your bank account. You should have a clear purpose in mind when you apply for any loan. If nothing else, the purpose of a loan will have a significant bearing on the types of loan that you consider, and ultimately apply for.
If you only have vague plans for what you want to do with the money, a loan is probably not the funding option that you should be considering. If you are hoping to increase the amount you have in your bank account when you go on holiday, for example, it is much more effective to look for temporary employment than to apply for a loan. Remember, you won’t only have to repay the loan, but also the interest, and any other fees.
What Type of Loan Will You Apply For?
Loans in the UK fall into one of two broad categories, secured and unsecured.
A secured loan is a loan that is tied to an asset. This means that, should you default on your loan repayments, you will forfeit the underlying asset, which your lenders can then seize. This underlying asset is known as collateral. It usually takes the form of property, but other valuable items such as jewellery can also be used. It is up to the lender to decide what they consider to be acceptable collateral. With a secured loan, the lender will usually be in a position to offer more favourable terms and the borrower will be able to apply for a greater amount overall. From the lender’s perspective, the collateral means that, if the borrower does default on their repayments, the lender is still guaranteed to recover something.
With an unsecured loan, there is no need to put up collateral. However, this raises the risk from the perspective of the lender. This increased risk is reflected in the terms under which unsecured loans are issued. Short term loans, such as payday loans, fall into this category. These types of loans have had a bad reputation in the past, but increased regulatory efforts mean that they are now a viable option for many people who need a quick cash injection.
Are You Prepared for the Applicable Fees and Interest Rates?
It is essential that you fully understand the terms of any loan that you apply for. In particular, you need to be clear about what your monthly repayments will be, and how much you will pay overall. The good news is that, under UK law, lenders are required to make this information clear to customers before they agree to borrow any money. The contract you sign should clearly show what the monthly repayment rate is, how long you will pay, and how much you will pay overall.
Once you are certain that you know what you are getting into, you can apply for a loan with confidence. Make sure that you don’t rush this decision; you cannot afford to play fast and loose with your finances.