Need a loan?
You need a loan. New car? Son or daughter off to university? Home improvements that can’t be put off any longer? For most of us, there will come a point in our life where borrowing some money will be a necessary financial step for the future. So what do you need to consider before you apply for a loan? There are lots of different products to choose from, all tailored for different circumstances and requirements, so before you apply you need to take the time to compare all your options so you can make the best choice for your circumstances.
Am I eligible to be applying for a loan?
Before you apply for any type of loan make sure you meet all acceptance criteria. This varies from lender to lender but as a minimum, you will need to be at least 18 and be able to show evidence that you can afford to pay the repayments in full and on time. If you’re in any doubt about whether you can afford the repayments then don’t apply.
What type of loan should I get?
Ask yourself what the loan is for? The type of loan you apply for depends on your circumstances and reasons for borrowing so consider carefully what one works best for your needs. You can choose from two types of loan, Secured or Unsecured:
- An unsecured loan is for people who want to borrow a relatively small amount, usually anything from £1000 to £25000. You cannot borrow more than £25,000 on an unsecured loan.
- A secured loan, or ‘homeowner loan’ is a debt held against your property. This means your home is at risk and may be repossessed if you don’t keep up with monthly repayments. Borrowing is usually from £10,000 to £100,000 depending on how much equity you have in your home. We do not compare secured loans on Choose Wisely.
Can I afford the repayments? Be realistic!
Work out whether you can afford the monthly repayments in full and on time. If you’re not sure whether you can afford the repayments then don’t apply for the loan. The terms you’re offered will depend on your credit record. Rates are increasingly competitive but the best rates are reserved for those with the best credit scores so bear in mind you may not be offered the advertised rate. A third of applicants will be offered a higher rate due to ‘risk-based pricing’ by the lender, where they match rates against your credit score. Remember, a higher rate may mean you cannot afford the repayments.
If you have a bad credit rating then be careful when applying to lenders advertising the lowest rates as you’ll probably be declined. Instead, check out our bad credit loans comparison table for the most competitive rate for you. When deciding on your loan term base your decision on how much you can afford to repay each month. If you opt for a longer term with lower monthly payments you’ll likely pay more interest in the long run, however, it could make repayment of the loan more manageable preventing the need to borrow again.
Do I need the loan?
If you’re looking for a short-term loan a credit card may be a better option. If you only need to borrow for less than 12 months then it’s worth considering a 0% purchase card as you’ll have the length of the introductory offer to pay back the money owed without interest. That’s interest-free! However, don’t be tempted to use the card for other things and make sure you pay it off before the end of the 0% period as once this expires you’ll be charged interest at a much higher rate.
Watch out for hidden costs:
- It can cost you to pay back the loan early. Many lenders charge early repayment penalties as they’re missing out on a chunk of interest. For amounts, less than £25,000 penalties are restricted to just two months’ worth of interest but for larger amounts penalties can be much higher.
- Read the lender's terms and conditions as there may be administration or arrangement fees and some charge you for late payments.
- Repayments can vary – rates on unsecured loans are usually fixed but secured loans have variable rates so your repayments can rise. Make sure you know what you are signing up for
- You don’t have to buy PPI (payment protection insurance) when you take out the loan. PPI is designed to cover the cost of loan & credit card repayments if you are unable to work due to accident, sickness or unemployment. You don’t have to get PPI from the same company you’re borrowing from and you don’t have to take out PPI when you take out the loan.
When applying for a loan consider what it’s for and be realistic about the repayments you can afford. Tailor your loan application to a realistic repayment plan that works to your financial benefit. Remember that a loan should be a helpful financial leg up and not something that plunges you into a financial nightmare.
Mark joined Choose Wisely in 2015. He continues to work in close contact with the providers, brokers and journalists operating in the world of consumer credit.