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Things to consider when looking for a loan
At first, a loan might look fairly straightforward: you borrow money from a lender, and pay it back over a set period of time. However, there’s more to it than that. A loan is a potentially very large financial commitment, and with some careful advance planning, you can save yourself a lot of money in the long run.
Here are a few things to take into consideration before applying for a loan.
What do you need the loan for?
A loan can be used to finance a range of things, but some purposes are more essential than others. Loans for financing some kind of purchase, whether it’s a new car, a holiday or a new TV, are known as personal loans.
Personal loans can be secured or unsecured. If a loan is secured, it means that you will have valuable assets (e.g. your home or car) secured as collateral against the loan, and these assets can be repossessed if you fail to make repayments.
Unsecured loans tend to be used for lower value purchases, or if you can repay the loan over a shorter term. They do not have any assets secured against them, meaning it is technically the safer option – but the interest rate on unsecured loans can be higher, and you are still likely to face serious consequences if you do not keep up on payments.
It’s also possible to take out a personal loan to cover all of your existing debts, known as a debt consolidation. This loan pays off all your existing debts, after which you repay the lender in convenient monthly payments, instead of paying various creditors.
With such a wide range of products on offer, choosing the right loan is not just an afternoon’s work. Ideally, you will want to give at least a couple of weeks to looking for the best loan deals, and making sure you are in the best financial shape to get those deals.
Of course, the interest rate you are offered depends heavily on how strong your credit history is. It’s worth checking this beforehand: sometimes, there may be false information on your credit history that could hinder your application. There are several services online that allow you to check this, and if you find any incorrect details, you should contact the relevant creditor(s) immediately and have the information amended.
It’s also important to establish how much you want to borrow, and how long you want to pay it back for. A longer repayment period may bring your monthly payments down, but it will also mean the loan is a burden on your finances for longer, and you will pay more in interest overall. If you can afford slightly higher monthly payments, it is well worth repaying the loan more quickly.
Where to look
Some people prefer the personal touch of going into the bank, building society or other lender and speaking to another person directly – but this can be time consuming and does not always give you access to the best deals.
There are numerous websites that compare a massive range of loan deals, some of which are only available online. This can save you time and ensure you find the best deals – but remember, you will only be able to get the lower interest rates if your credit history is strong.
Once you have your loan, there is the chance that you may one day find yourself unable to make repayments (due to illness, redundancy or other unexpected life events).
For many people, Payment Protection Insurance (PPI) can help keep minds at rest. It’s important to thoroughly check the policy before taking out any insurance, to make sure you understand the circumstances in which you will and won’t be covered. If you have life insurance/assurance already, it’s worth checking whether this will pay out if you experience similar issues.
Written by Melanie Taylor of Think Money (http://www.thinkmoney.com). Think Money are a financial solutions company based in Salford Quays, Manchester. The company specialises in a range of financial services, including mortgages, loans, debt help and advice (including debt management plans, IVAs, and debt consolidation).
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