Personal loans can be taken out for any number of things, be it a wedding, new car or home improvements. There are lots of different rates on offer, and before you apply it’s worth taking a look at your finances to see how much taking a loan out will cost you, and how long it’ll take before you can pay it back. Here are five steps to finding the best personal loan for you.
The longer it takes to pay off, the more interest you’ll pay
When you take out a personal loan, you can choose the period over which you will pay it back. On the whole the shorter this is, the smaller the interest you’ll pay on the loan.
For example, if you take out a loan of up to £2,000, Santander charges 13.5 per cent interest. But if you take out a loan of more than £15,000 M&S Bank will charge 2.9 per cent. As you’re likely to pay the smaller loan back in less time, even though the initial interest rate is higher, you should end up paying out less overall to take out this loan.
Check your eligibility first
Applying for credit, be it a credit card or a loan, impacts your credit score. This is because when you apply lenders will check your credit history to decide how likely you are to repay the loan, and based on this they will decide if they will lend to you or not, and at what rate. If you make lots of applications in a short space of time this can impact your credit score negatively because it may look like you are desperate to get your hands on the money.
Therefore it’s worth using a free eligibility calculator first. There are several of these around and they work by looking at your finances and assessing the likelihood of you being accepted for credit. The important thing to note is that these checkers should not impact your credit score and won’t leave a mark on your history.
They can be used as an indicator to let you know what kind of loans you’ll be accepted for, before you apply.
Is a loan the cheapest option?
It’s important to consider all your options before you take out a personal loan, to make sure it’s the right option for your circumstances.
For example, if you’re borrowing money over a short period of time, a credit card may be cheaper for you. This will only be the case if you are paying less interest on the credit card than you would have been with the personal loan.
Of course you will also need to make sure you pay the credit card off on time, as if not you will be stung with interest and fees which will make the loan more expensive.
Other options could include, borrowing from friends and family, if this is possible.
Lenders will look at your income and credit history before giving you a loan
To get a market-leading rate you’ll need to have a good credit score. This is because lenders look at your score first, to decide how likely you are to pay the loan back.
Lenders also look at your income to calculate how long it’ll take you to pay the loan back. Your spending, such as household bills, children, and rent or mortgage costs are also taken into account when lenders make their decision.
You can overpay the loan early if you choose to
Personal loan will be set out as monthly repayments over a time period, for example £300 a month for five years.
However, if you are able to pay the loan off early you will be allowed to. The terms and conditions of paying off a loan early will tell you how much this might cost you, it’s usually a month or two of interest.