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SECURED LOANS: YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE, LOAN OR ANY OTHER DEBT SECURED ON IT.
Are you thinking of buying a car? Maybe you need a new washing machine or sofa. Or perhaps you want to jet off to sunnier climes for a well-earned break.
Most of us can t afford to pay for such big-ticket items out of our regular income. Instead we need to borrow the money and a personal loan might be the answer.
Fixed monthly payments
A personal loan, sometimes called an unsecured loan, is different from an overdraft or credit card because it allows you to borrow a fixed amount over a fixed term, usually at a fixed rate of interest.
For example, you might borrow 5,000 over three years at 9%. You therefore know at the outset how much you have to pay back each month, as well as the total cost of the loan, making it easier to budget.
Most banks and building societies offer personal loans. They are also available through the growing number of peer2peer lenders, though these are as yet unregulated.
How much can you borrow?
You can usually borrow up to 25,000 with a personal loan any more and the lender will want you to put up an asset (such as property) as security. Interest rates vary, but generally speaking, the bigger the loan amount, the lower the rate of interest. You might, for instance, pay 12% on a 1,000 loan but only 7% on a loan of 7,000.
It can therefore be more cost-effective to borrow a larger amount, perhaps 7,000 instead of 6,500. But avoid taking out a loan you cannot afford to service or repay. Personal loans might be unsecured, but you still have to pay the money back.
Term of the loan
Lenders typically offer terms of one, three and five years and it can be tempting to opt for a longer term in order to reduce the monthly payments. For example, if you were to borrow 5,000 over three years at 9%, your monthly payments would be about 160, so you would pay total interest of approximately 700.
Extend the term to five years and your monthly payments drop to 104. However, you would pay about 1,240 in total interest, so the loan is ultimately more expensive.
The rate you pay will largely depend on your credit score. Most lenders carry out a credit check when you apply for a personal loan and if you have struggled with debts in the past and have a poor credit history, you could be turned down flat or charged a higher rate of interest.
Low advertised rates
Watch out for low advertised rates as they are not guaranteed. By law, the rate on an advert must be given to 51% of successful applicants. In other words, almost half will pay a different probably higher rate. The figures also do not include the people who are refused credit.
If your application is rejected, it s a good idea to check that your credit record is accurate, or try to improve your score before you contact another lender. You leave a footprint every time you apply for credit and lenders are wary of people who make multiple applications.
Some lenders charge arrangement fees, which can bump up the cost of credit. You should also beware of any early redemption fees should you choose to clear the debt before the end of the loan term.
Some borrowers take out a personal loan in order to consolidate other debts. Let s say you have accumulated debts on credit and store cards at high rates of interest. If you take out a low-rate loan to clear the card debts, you could save money. And if you then cut up the cards you can keep your borrowings under control. Check with your potential lender first, though, as some do not allow consolidation.
Alternatives to personal loans
A personal loan can be a sensible option for many borrowers, but it s worth considering the alternatives. For example, if you need a bit of extra cash to tide you over for a few days, you might be better off with an overdraft. You can also use 0% credit cards to your advantage, either to purchase a one-off expensive item, or to consolidate debts.
Compare loan rates
If you are searching for a personal loan, Moneysupermarket can help. Our comparison service carries the details of hundreds of different loans, big and small, short term and long term, so you can be sure to find the best deal