Throughout the UK, every one in ten adults has a personal loan they are paying back. The average personal loan balance is around £10,000 with a repayment term of four years. Personal loans are popular among consumers because they provide a relatively fast lump sum that is then repaid over time. Those who are facing a financial emergency, or who simply do not want to use savings for a large expense, can tap into personal loans for help with longer-term financing.
Although personal loans are a great resource for big-ticket items or surprise bills, they do come at a cost. Lenders require borrowers to repay the principal amount borrowed, plus interest, which can add up to a significant expense if borrowers aren’t careful. Getting a personal loan that is both cost-effective and manageable requires following the steps below.
Check Other Sources
Before jumping to a personal loan for financial help, consumers should research their options from other sources. This may mean tapping into savings or investments to help cover a financial emergency or looking to friends and family for a low or no-cost short-term loan. Searching for other avenues is the first step because it may prove more cost-effective than a long-term loan.
Know What You Can Afford
If a personal loan is the best option after reviewing other sources of financing, checking the budget is the next smart step in the process. Lenders take steps to verify that borrowers can repay any amount loaned to them, but the onus falls on the consumer to know exactly what is available in the monthly budget to cover the loan payment. Missing a payment or defaulting on a loan altogether has real-life, long-term consequences that make getting access to other financing a challenge in the future.
Understand Your Credit
Next, borrowers need to take a close look at their credit situation. Through each of the three major credit reference agencies – Equifax, Experian, and Callcredit – borrowers have a record of their financial past and present. A personal loan lender will check a borrower’s credit before approving a loan, so it is helpful to know what your credit looks like before applying. Negative marks, such as late payments or court judgments, will drag a credit report and score down. Lenders are less likely to approve a personal loan application if bad credit is in play.
Avoid Costly Loans
If a borrower has bad credit, there are alternatives to traditional personal loans, known as payday loans. According to a finance specialist with Money Pug, a website used to compared payday loans, these alternative financing vehicles can work well in a pinch, but they are expensive. As a last resort, bad credit borrowers can use payday loans to get smaller loans from certain lenders with a short repayment term, and without a credit check. However, it is necessary to fully review payday loan offers before signing on the dotted line. This review should include a comparison of the rate charged, other fees assessed, and the amount of time one has to repay the loan.
Whether a payday loan or a traditional personal loan, borrowers can ensure they are getting the best deal based on their credit history and budget by comparing offers from various lenders. There are many different personal loan providers operating both in physical locations, such as a bank, and online. Each has its own loan options, interest rates, costs, and restrictions. Comparing two or more lenders will help a borrower see what loan options are available as well as which option may suit their financing needs in the best possible way.
Check the Fine Print
Finally, borrowers need to check the fine print of any loan they plan to accept. Loan agreements are provided from the lender at the time a loan is approved, providing detailed information on the cost of the loan by way of the interest rate, the repayment term of the loan, and the monthly payment due. If any of these details do not match up to what was originally offered, be sure to ask the lender what changed and why. Borrowers who cannot get a clear answer or those who notice other issues with a loan agreement may want to look elsewhere for a personal loan.
Getting a personal loan is not typically a difficult process. However, getting a loan that best suits your needs as a borrower takes some time. Be sure to understand what you qualify for based on your credit history, and compare various lenders before signing on the dotted line. Also, take the time to read through your loan agreement to make sure it matches up with what you were offered in the first place. These steps will help you get the best personal loan for your needs.