If you’ve never taken out a personal loan before, then they can seem like scary and intimidating things. You might have heard that loans are always predatory, or that they’re impossible to pay back, and while that’s certainly true of some loans, it definitely isn’t true of all of them. There’s a lot of misinformation floating around out there about loans, and we’re here to set the record straight and hopefully set your mind at ease when it comes to applying for a loan. Here are 8 things you should know about personal loans.
1. They’re all different
Perhaps somewhat confusingly, our first point is simply this: personal loans are all different. While there’s regulation dictating what companies can and can’t do when it comes to loans, there’s also a lot of wiggle room within that regulation, so each personal loan provider is very much not created equal. That means that you could easily be looking for a loan for a certain amount and be given totally different terms by two lenders, so make sure that you’re shopping around!
2. The amount varies wildly
You might think that you can only borrow a certain amount from personal loan providers, but you’d be wrong (within reason, of course). The fact is that loans can be offered for hundreds of pounds, with amounts sometimes reaching into the hundreds of thousands depending on your circumstances. If you think that the amount you need just wouldn’t be offered by a personal loan provider, then you’re almost certainly looking in the wrong place, so keep looking.
3. Your credit score matters
If you’ve never checked your credit score, it’s definitely a good idea to do so. This figure shows how worthy you are of credit in the eyes of lenders and other companies, and if it’s particularly low, then you may struggle to get a loan. Credit score (or credit rating – you’ll often see them used interchangeably, although they do technically mean different things) is affected by everything from missed loan payments to not being on the electoral register, so there are always ways to improve it.
4. The difference between secured and unsecured loans
Fundamentally, there are two different types of loan. Here’s a quick breakdown of those types and what they mean for you as a customer.
- Unsecured loans are the simplest kind of personal loan. In essence, they simply involve a lender providing money for you at a certain interest rate, with no collateral fixed against the amount if you don’t pay. Unsecured loan amounts tend to be lower, but you also have the peace of mind that nothing you own will be repossessed if you don’t pay.
- Secured loans tend to grant higher amounts of money, but they’re almost always “secured” against something in return. This is usually a property you own, a vehicle, or some other valuable item. A mortgage would be an example of a secured loan; you’re paying your mortgage with the understanding that if you miss enough payments, your home might be repossessed.
5. Always read terms and conditions
Nobody likes to pore over terms and conditions for lengthy periods of time, but it’s a good idea to make sure you do so. Different loan providers can impose different terms and conditions on you, and if you fall foul of one of them, it could have serious consequences for you. Make sure to carefully read the terms and conditions of your loan. If you need to, then recruit a second pair of eyes – a partner, say, or a friend – to help you read, because terms and conditions are often deliberately oblique.
6. Repayment plans are often flexible
Most personal loan providers will offer flexible repayment plans, allowing you to dictate when you pay your loan back. There will, of course, usually be minimum repayments, and a minimum term as well, but beyond that, you can set your own limits. For example, most loans will allow you to pay them back more quickly if you like (although this may not always be a good idea depending on your end goal). Be sure to talk to your loan provider before making decisions on repayment plans.
7. Loans can be good for your personal credit
Contrary to popular belief (and perhaps even to intuition), loans can actually be good for you when it comes to boosting your personal credit score. If you pay off a loan, then lenders will see that you’re reliable in terms of making regular repayments, which will in turn make them more likely to trust you with any future loan investments. Conversely, if you never take out loans, lenders can’t see whether you’re trustworthy or not, so paradoxically, it might actually be harder to get a loan.
8. Interest rates are very important
Make sure that you don’t commit to taking out a loan without being aware of the interest rates. Interest rates are how lenders make profit from loans, so every loan will have an interest rate attached to it. Some are higher and some are lower, and they’re usually affected by things like how long the loan term is and how much you’re borrowing. If the interest rate for a loan seems too high, then there’s no shame in looking elsewhere or deciding not to take the loan out after all.
Of course, you can never know everything about personal loans (unless you’re a finance expert, obviously!), but these tips should give you a good grounding for your first loan application. Did we miss anything? What do you think people should know about personal loans?