How to Understand Personal Loans


There may be special circum­stances that justify looking for a loan. For example, you may be paying too much interest on your current loan, and want to replace it with a loan that charges less interest so that you can pay it off more quickly. What follows, therefore, is information to help you find the right loan, but remember: you should borrow only what you absolutely need, and you should be aiming to reduce your overall borrowing, not increasing it.

The personal loan market is fiercely competitive nowadays, and many new lenders have appeared on the scene – even supermarket chains are offering loans these days. So shop around for the best deal, and do your research as thoroughly as possible. Deals vary widely, and you could well save yourself hundreds, or even thousands, of pounds by securing the very best terms for yourself.

Don’t assume, however, that your own bank or the bank nearest your home or place of work will offer the most competitive deal – it often pays to widen your search. Many internet banks, for example, offer loans at much lower rates of interest than those offered by traditional banks. There are also other lenders offering competitive deals, so allow yourself enough time for research.

When you find a deal that looks reasonable, check the small print and find out whether the loan is secured or unsecured. If it is a secured loan, the lender will require you to put up a valuable asset to cover the loan should you default on payment. The asset may well be your home, which you could lose if you do not keep up repayments. With an unsecured loan, you will not have to offer an asset as security.

Make sure you check all the terms of the loan, and whether the repayments will be fixed for the length of the term or whether they will fluctuate. In order to organise your personal finances properly, you need to know exactly what you will have to pay over the term of the loan, so getting the right information is vital.

It is also worth bearing in mind that personal loans usually have higher rates of interest than mortgages, and have to be repaid over a shorter period of time. As a result, you may well find that the monthly repayments on your loan are higher than they would be if you borrowed the same amount on a mortgage. This is mainly because the loan has to be repaid in a shorter time than a mortgage, but it is also due to the higher interest rate charged. You may therefore find it easier to remortgage your home in order to give you a lower interest rate and smaller monthly repayments. However, remember that choosing the mortgage route will mean the loan will take much longer to pay off, and as a result you will ultimately pay more in interest, even with the lower interest rate. Each person’s situation is different, so once again the best course of action is to consult an independent financial adviser, who will be able to give you specific information relating to your circumstances, and help you make the right decisions.

As with any borrowing, remember one simple rule: never borrow more than you really need – keep your borrowing down and you will ultimately have more money in your pocket. One of the best ways of improving your financial situation is always to keep a close eye on your borrowing. Keep reviewing your borrowing arrange­ments and see if you can get better deals elsewhere. A few phone calls may be all you need to save yourself a substantial sum, and to ensure that your monthly repayments stay within limits that you find easy to manage.

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About the Author: Marie Mayle is a contributor to the MegaHowTo team, writer, and entrepreneur based in California USA. She holds a degree in Business Administration. She loves to write about business and finance issues and how to tackle them.

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