At some point in our lives, most of us might land up in situations where we’ll have to apply for bank loans- whether it is to pay for an expense that you had not planned for, to fund an important purchase or to simply provide yourself with some breathing space when you have to borrow cash on a short term basis.
So, if you’re thinking of taking out an unsecured loan in order to fund a thrilling purchase or an unforeseen expenditure, then you’ll surely want your borrowing to last longer.
Nevertheless, you can make the entire process a lot easier by simply following these simple tips. So, let’s take a look at these top tips, which could assist you in successfully taking out a personal loan.
- Check your Credit Rating
Your credit history (and as a result the credit rating) plays an important role in your application for a personal loan, since the rate of interest (APR) applicable on the borrowing and more importantly whether or not you will be given the loan in the first place can be largely determined by your previous credit behaviour.
If you’re perceived as a “high risk borrower”- for example when you have a history of failing to make the necessary payments- then probably the loan deal offered to you will have higher APR, since they are particularly intended as loans for borrowers with bad credit.
Due to this, it is crucial to take a look at your credit rating before you apply for a loan. Thus, you can ensure that you are entitled to affordable loans. You can even do this online by seeking assistance of several credit reference agencies in the United Kingdom, although, you might be asked to pay charges in order to check your credit record.
When you check your credit rating, you’re ensuring that there isn’t any mistake, which may have an adverse impact on your score. You’re also able to gain some more insight as to what you can expect whenever it comes to applying for loan. This way, you can even bolster your credit rating before you apply for a credit.
- Look beyond the Headline Rate
When thinking of taking out a secured or unsecured loan, you’ll notice a “representative APR” advertised. Put simply, it signifies the interest rate that is made available by building society or banks to credits taken out by no less than 51% of borrowers.
You need to be aware that most of the lenders only apply their headline rate to loans of a specific amount. Many of them state a lower as well as upper borrowing limit and for those limits the advertised interest rate will be applicable, thus it is vital to check this out.
For that matter, it is vital to find out how much will the loan cost depending upon how much you have to borrow. You can do this by simply reading the small print or you can make use of a loan calculator or else you can find the cost of the credit by yourself online.
However, it’ worth noting that- you should avoid getting quotes from providers for numerous credits all at once, since this can have a negative impact on the credit rating. This occurs mainly because, it’ll make it appear as if you are in desperate need of a loan. Not to mention, you’ll be seen as a “high risk borrower” and one who should only be approved for poor credit loan. Rather, it is better to make use of a loan repayment calculator in order to give yourself a rough idea about the expense before you apply for a loan.
- Shop Around
When you’re applying for a line of credit or any other financial product for that matter, it is crucial for you to compare what else is currently available on the market so that you can find the right deal for yourself. Whilst comparing loans, it is important for you to take a look beyond the top ten loans that are available, as well as compare the loan rates and the expense that you’ll have to borrow from the lenders out there.
You’ll also have to take a look at the quoted representative APR because this will be included in the cost of your credit along with the interest rate and other charges. The representative rate, though, will only be provided to an average of 51% of borrowers and might be applied to a fixed amount of cash. Thus, you need to look for loans that offer you affordable rates for the amount required.
Likewise note that, you need to check the application criteria before applying in order to ensure that you are entitled because lenders often confine their loans availability to individuals with a fair credit score. However, unsecured personal loan, secured loan and also debt consolidation loan is available for borrowers with a poor credit history.
- Consider Alternatives
On the basis of how much you want to borrow, you might benefit from opting for a credit card, which provides interest free purchase rather than a loan. This could specifically be the case if you’re thinking of borrowing just a small amount, like for instance £500-£1,000; as small everyday credit often attracts higher interest rates.
By opting for a 0% purchase card, you can borrow the amount you require- provided the fact that your credit limit expands to this- without charging interest, provided you pay off the balance before the introductory period commences. This can turn out to be much more cost effective in comparison to taking a personal if you only require a smaller amount.
- Remember, you shouldn’t make use of your new credit card for anything rather than for the actual amount, which you have to borrow.
- Ensure that it’s completely cleared before you’re charged on the debt.
- In order to make it easier, it would be worth fixing up a direct debit for your present account, so as to ensure that a part of the balance is reimbursed automatically every month.
- Ensure that at least minimum reimbursements are kept up, till the time the balance is paid off.
- Ensure you’re getting a card with interest free term, so that you’re able to pay the entire amount off, or else this is not a practical option and you might be better off with low rate credit cards.
- Think about Early Repayment Charges
It may look unlikely to you at the time you are taking out the personal loan, but do not forget that it is possible that you would be able to repay your debt early. Most of the loan lenders apply charges if you want to do so, thus it is best to verify how much it may cost you before opting for a specific deal.
If you feel that there’s a good chance that you’ll want to pay off the loan beforehand, then it’s worth looking for a deal, which comes without you having to pay any “early repayment charges”.
- Look out for PPI in your Loan
Payment Protection Insurance (PPI) was intended to cover your monthly credit card or loan repayments, if you were unable to do so because of sickness or unemployment. In some scenarios, it could be a good idea for individuals who want to feel assured that no matter what happens their loan will be repaid. Yet, PPI has had some bad press wherein it was mentioned that many banks and financial institutions misused the policy for their greed. It has been sold along with loans without the consent of the buyer. Not to mention, certain banks and institutions even sold the policy saying that it was compulsory.
However, when the scam was revealed, customers who were mis-sold PPI filed a legal complaint against their respective policy lenders, claiming for a refund. If their claim was proved to be legitimate, they were duly paid their money back.
Therefore, before you apply for a personal loan do look out for PPI and if you or your loved ones have already taken one, then you might perhaps be entitled to a PPI refund, if it was added to your loan without you your knowledge or consent. Such unexpected sources of income can also help you out in times of need.
- Consider a Credit Card
Before applying for personal loans, you need to take into consideration other forms of credit as well. You may find that a credit card is affordable and a card that provides 0% introductory offer on every purchase would allow you to spread the expense of big purchase without any interest.
However, if you do not think that you’ll be capable enough to pay off the debt within the 0% offer period, then you might be better off with a long term loan with a low rate of interest.
- Loyalty does not Always Pay
If you want to take out a personal loan, it would seem obvious to go to your bank directly especially if you are well known as a customer and have taken out similar products before. Nevertheless, being faithful to the bank does not always mean that you will be offered the best deals.
Being loyal in the world of finance rarely pays off because you might be offered the best deal on your respective loan- like for instance flexible terms on reimbursements or a lower APR- only by a bank that’s welcoming you for the first time as a new customer. This is one more reason why you must shop around and compare what is available to you before applying for a line of credit or some other financial product.
- Take the Term into Account
A vital factor of your loan will always be the timeline given to you in order to pay it off; and this is popularly known as the “loan term”. Keep in mind that the longer the term limit is, the more expensive your overall loan would be, since you’ll be paying interest on it till the loan term comes to an end.
For instance, if you take out £5,000 loan with an APR of 8% for a loan term of 5 years, then you’ll probably be paying £400 per year for 5 years- this would add up to £2,000 overall in interest itself. On the other hand, if you take the same loan for around 2 years, then you would probably paying £800 as interest.
All this comes down to a balance between repaying your loan rapidly and spreading the reimbursements more finely.
If you opt to repay your loan rapidly, then you will no longer have any debt accumulating interest. Yet, you might not be able to manage the reimbursements that are necessary to do this.
Conversely, if you make repayments in smaller amounts, then they’ll be easy to manage. However, the lifespan of your loan will be longer and thus additional interest will be rolled overall.
So, before you apply for a loan, you need to work out how much you’ll be capable enough of paying back each month, so that you can agree for a loan term that best suits your needs and budget.
- Fix your Rate
Typically, it is best to choose a loan, which applies a fixed interest rate on your borrowing. Put simply, it means that rate at which the interest will be applied to the debt, and more significantly the amount you’ll require to repay would remain the same throughout the lifespan of your credit.
When you take out a line of credit that applies a fixed rate of interest instead of an inconsistent one, which could possibly increase at any point during the loan term, you can rest easy knowing exactly how much interest you will be charged by the lender every month and accordingly prepare a budget.
Most of the unsecured loans these day offer fixed interest rates, yet it’s crucial to read the small print carefully before you apply for it, in order to be certain of what the actual interest rate will be and for how long it will stay fixed.
- Borrow More
This might sound counter-intuitive, yet there’s ample to suggest that banks and other financial institutions are more inclined to provide loan to individuals who are applying for larger instead of smaller amounts. This is mainly because a provider is likely to make more interest over a longer period of time with larger loans compared to the smaller ones.
Put simply, the larger the loan amount is the lower will be the interest rate. Because of the way certain lenders price their credits, there are opportunities wherein you can save your money by borrowing a little more.
For instance, a £7,000 loan over 5 years is advertised at 13.9% APR along with reimbursements of £159.58 per month. But, if you were to borrow an extra £500, then the advertised rate of interest drops to 6.4% APR and even the monthly repayment reduces to £145.76. Thus, borrowing an additional £500 will really save you around £829.20 over the entire 60 month loan term.
- Do not Apply for too many Loans
Customers who are applying for a personal loan online will likely leave behind a “footprint” on the credit record that providers always check before they approve your loan.
Having numerous applications on your record could perhaps make you look in need of money or in financial problems. Due to this, the provider will see you as a “high risk borrower”, which would reduce the chances of your application being approved by them.
- Be Aware of the Risks of Secured Loans
Secured loans are affordable in comparison to unsecured loans, yet you can easily run the risk of losing your property if you do not keep up with your monthly repayments. Secured loan is only provided to homeowners who have equity tied up in their property and the provider can effectively take charge of the home.
So, avoid signing up unless you are 100% sure that you’ll be able to meet all the necessary repayments- such types of loans are less risky for providers and more risky for the borrowers.