How to consider what is the right loan for you
May 10, 2015
In choosing the best loan for you, consideration should be given to a number of factors, including the loan term, interest rate and your borrowing limits. Although you’ll probably have an idea of the type of loan you want, whether secured or unsecured, let’s first look at the main differences between the two.
Secured vs unsecured
Taking out a secured loan involves more risk as borrowing will be secured on an asset. Should you default on payment, the lender can use the security to recover their money.
Assets used to secure loans generally include property and vehicles, and in the case of property, you are basically risking the repossession of your home should you be unable to meet the repayments.
Unsecured loans are commonly taken out for large ‘one-off’ expenses such as home improvements, a car or holiday, with one of the attractions being the fixed nature of interest and timescale to completion.
The interest rate will be set at the time the loan is taken out, and time periods can vary between one year and seven years on average.
With respect to unsecured loans, what are the main features and aspects to think about?
Loan term and interest rate
It is often the case that interest rates reduce with the more money you borrow. Although this may seem attractive at the time, taking out a larger loan may not be worthwhile if you do not really need the money – consider what would happen if you lost your job, or were otherwise unable to meet the repayments?
The APR, or annual percentage rate, includes all fees and charges associated with the loan. This figure reveals the true cost to you of borrowing the money. It is more accurate to compare the APR of each loan, rather than the interest rates provided by the lender.
Although some institutions offer loans over a period of six months, more commonly the duration is between one and seven years. Seven years is often the maximum term for an unsecured personal loan, with two or three years being the average.
Are there any limits on your borrowing capacity?
Unsecured personal loans are generally offered in the region of £15,000, with some lenders offering up to £25,000. How much you can borrow is dictated by a number of factors, not least of which is your credit rating.
Each time you apply for a loan, the lender will check your credit file to assess their level of risk. If your credit score is too low, or you are not registered on the Electoral Roll, you may be turned down or offered a higher rate of interest.
For this reason, it would be worthwhile checking your credit file before applying for any borrowing, as you can take steps to improve your credit rating if necessary. A financial advisor may be able to help you find the best loan for you, without having to make a full application.
Banks and building societies
The ‘Big Four’ banks were once seen as the main source of lending for consumers, but the recent arrival of ‘challenger’ banks has opened up the market a little. Supermarket chains such as Tesco and Sainsbury’s now offer personal loans at competitive rates, as do credit unions, although loans offered here are generally smaller than those available from the main financial institutions.
The best advice is to shop around – comparison websites can be useful in this respect if you choose not to use the services of a financial advisor.
You may want to avoid taking out a payday loan, however. This type of loan should be treated with caution as they incorporate high rates of interest, with severe penalties for missed or late payment. They have been known to quickly exacerbate an already stressful situation.
Scotland Debt Solutions offers free personal insolvency advice to Scottish residents, and operate from offices around Scotland.
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