If you need some extra cash, whether it’s to buy a new car, do up your kitchen or even to consolidate existing debts, a personal loan is one of the most straightforward ways to borrow.
There are scores of different loans available, so how do you go about choosing one that is right for you? Here are six questions you need to answer:
1) How much do you need?
You have no doubt got a good idea, at least roughly, how much you’ll need to borrow. Most lenders put a ceiling on the potential size of loans, typically at around £20,000 or £30,000.
If you need to borrow more, you will probably have to look at a secured loan – which is backed by your property, for example – or some form of remortgaging.
2) How much can you afford to repay?
The other big question is, how much spare monthly income do you have to make repayments? A personal loan is a commitment to make equal repayments every month, normally for between one and five years: so you’ll need to look at your earnings and outgoings to see make sure you can afford the loan, and perhaps also to see if there are any areas where you can cut back.
3) What interest rate will you have to pay?
Best-buy tables found online or in the press will show the “headline” rate of interest (usually called an APR or annual percentage rate) on any given loan. But bear in mind that there is no guarantee that the headline rate is the rate you will pay: this just means that a majority of customers are offered this rate. Those with poorer credit histories, on the other hand, will normally find it more expensive to borrow.
If you have a clean credit history with no record of missed payments or defaults, however, you can expect to be given the headline rate.
4) What else affects the rate?
Most lenders have a variety of rates they charge depending on the size of the loan taken out and how long it is taken out for. Rates on small loans (of less than £5,000 or £7,500, say) tend to be higher: this is to reflect the proportionately higher administrative costs. And you may also find that borrowing over two or three years means a cheaper APR than taking out a loan over five years – although this is not always the case.
5) How long should you borrow for?
Other things being equal, the longer you borrow for, the lower your monthly repayments will be. But bear in mind that, as mentioned above, your APR could be higher, and because the debt stretches over a longer period, you will end up paying more interest in total.
6) How can you find out what loan you’ll be eligible for?
Some lenders allow you to check your eligibility for a particular size of loan without this having an impact on your credit record. (Sometimes, if you apply for a lot of loans over a short space of time, it can give a negative impression when your credit file is checked.)
This will give you a very good idea of whether you’ll be able to borrow the amount you need as well as the size of your monthly repayments. All that remains at this point is to go ahead and make a formal application.
Find out more about Zopa loans.