Choosing a Personal Loan

When choosing a personal loan, the first point to consider is whether or not you actually need a loan. It can be an expensive way of obtaining money, and if you have savings that you can dip into this might be the better route. Or, are you trying to pay for a luxury now at the cost of your future income stream? Once you’ve made the decision that a personal loan is the way to go, you then need to decide what type of loan you’ll take out.

APR is a key consideration when choosing a loan, but as always – buyer beware. Some lenders will quote a very low APR, but when you come to take out the loan the rate that they give you is significantly higher. Why? They’ll create a profile of you, and assess risk – how likely you are to default on the loan. It’s like getting car insurance. If they think you might be high risk, they’ll charge a correspondingly higher rate to compensate. A fraction of all borrowers will default on their loan, so people who fit this profile are asked to pay more. The lenders argue that this pays for those who do indeed default. So whether you like it or not, it’s important to get to the bottom of matters and find out exactly how much you will be paying.

In addition, you should read the small print and find out if there are any restrictions on your loan. Some lenders will require you to pay the loan over a lengthy term. The longer they can stretch out your loan, the more money you’ll end up paying them in interest. To discourage people from trying to pay back early, they may actually penalise you and charge extra interest if you try and pay off your loan more quickly.

Finally, think about how stable your finances are. Do you have enough money to cover the necessities if you suddenly find yourself out of work? If the answer is no, you should look for a loan that will allow a payment break during troubled times. Of course there’s a cost to this – it’ll drag out the period of your loan and means you’ll pay more interest overall.