Why do people take out loans and what are the best options?
There are many reasons why people decide to take out personal loans. For the majority it’s either because they want to pay off existing loans or because they need the extra money for business purposes. Other reasons can include home improvements, funding education and car repairs.
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Types of personal loans
The great thing about a personal loan is that you can use it for any purpose. There are various types of personal loans available for borrowers, but the two most common types are secured and unsecured.
Secured loans typically have lower interest rates and are secured by a cash flow or asset. Unsecured loans are a bit different because they don’t have a specific claim on assets or cash flow. The lender will look to the general creditworthiness of the borrower. It’s a greater risk for the lender and also means that interest rates are higher.
In addition to secured and unsecured loans you’ll also need to consider how long you’ll be borrowing for. You’ll need to think about whether a short, medium or long term loan would be best.
Short Term Loans
Short term loans such as payday loans are quite controversial. They usually provide loans for small amounts of money, typically £100-£1,000. These types of loans usually have extremely high interest rates and have high charges if you fall behind on repayments.
Medium Term Loans
Usually around one to seven years, these types of loans are available from mainstream lenders. You can usually borrow £1,000 – £25,000 with a medium term loan.
Long Term Loans
You can get two types of long term loans. Homeowner loans which are also known as secured loans and mortgage loans. If you’re looking to borrow a large amount of money (£5,000-£500,000) lenders usually want some kind of security in return.
Why get a personal loan?
When it comes to borrowing money there are lots of different options available. From peer-to-peer lending, payday loans, asking friends and family to personal loans the options are extensive, but there are many reasons why a personal loan is a better option to that of a payday loan for example.
For starters many payday loan companies have hidden fees and can charge eye-watering APRs.
Although payday loans may be convenient in terms of getting money fast, quite often the issue arises when the borrower is unable to pay it back leaving them in serious financial straits.
How much can I borrow?
With a personal loan the amount you can borrow depends on your personal circumstances. When borrowing money from a bank, a number of checks are done to help ensure you can afford the repayments. If you do experience difficulty in making the repayments most banks will have a range of options available to help you.
Be sensible!
Regardless of the reason why you want to borrow money, it’s important to take a look at all of the options available.
Do your research, find the best deals and don’t be afraid to ask for advice.
Here are some things to think about before borrowing money:
How much do you really need to borrow
Can you afford to make the repayments
What’s the APR?
How much will you end up paying back?
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