If you’re not too clear on what a personal loan is, it’s an amount of money you borrow from a bank, credit union or online lender which you then pay back, typically in fixed monthly instalments, over the course of a few years. Of course, nothing is for free in this world, so the sum you pay back will be subject to interest.
Personal loans used to be something of an unknown, but they’re becoming more popular by the day – which is an indicator that more of us are struggling to make ends meet via the money from our jobs alone. While that’s not a good thing, if you do need to take out a loan, rest easy knowing you’re certainly not the only one. Before you start applying, here are the basics you should know.
Why you’d need one
There are a multitude of reasons to take out a loan. The simple answer would be that you don’t have enough money to do the things you want or need to do in life, but there are a few very common reasons for getting one:
- University: Probably the first time most of us will face the prospect of a loan. You’ll likely get your student loan to pay your tuition fees and a maintenance loan to help cover your living costs, but it still might be tough to make ends meet. That’d be where an additional personal loan would come in.
- Unexpected life event: Life has a nasty habit of throwing hurdles in the way. Perhaps it’s an illness that takes you out of work, or a major home or car repair that requires immediate attention. If you don’t have a backup fund to pay for these, you’ll need help from elsewhere – like a loan.
- Expected life event: You may know you’ll be getting married one day, or having kids, but that doesn’t mean it’s possible to truly financially prepare for them without a little help.
- Debt management: If you’re already struggling with other debts, you can use a personal loan to redistribute your current debts and better manage interest rates.
Most personal loans are unsecured, meaning you don’t have to put any collateral up to get one. Application wise, you’re best looking to a lender with whom you already have a relationship – they may be able to offer you recommendations on what type of loan best suits your needs.
Bear in mind the terms of your loan are likely to be dictated by your credit score. For example, if yours is particularly poor, you might only be able to access funding with a low maximum amount and high interest rates.
It’s critical when applying that you only take out an amount you know you can afford to repay. Don’t overshoot the runway and end up in more debt than you can handle, because it’ll be incredibly tough to get out of it.
Interest, fees and repayments
One you’ve established your interest rate, it’s likely that it’ll be a fixed amount that will remain the same for the entirety of the repayment. It’s important to check this, though, as you could be working with a variable interest rate which changes periodically. Try to stay away from the latter, as it’s difficult to budget when you don’t know what you’ll owe every month.
Repayment periods are usually somewhere between one and five years. The shorter your term, the less interest you’ll pay in total, but the higher your monthly instalments will be. The longer your term, the lower the monthly amount you’ll have to pay back but over a protracted period of time, in turn resulting in more interest repaid.
Thus, if you can afford to get the loan off your back quickly, do so – it’ll save you money in the long run.
More people are taking out personal loans
By the end of 2017, over £16bn a month of unsecured loans were being lent. While a portion of that is car finance and credit cards, much of it was personal loan money. The unsecured loan figure has been steadily increasing to this point, with a total of £191bn going out in 2017.
The fact is more people are turning to unsecured funding to help them make life’s essential purchases and manage debt. This is likely something to do with the rising cost of living and stagnating wages, with many young adults in particular harbouring no savings to back them up in times of financial need.
So, if you’re on the verge of getting a personal loan, remember you’re not the only one. Do your research beforehand on the best option to suit you, and make sure to have a strategy in place to pay the total sum back in good time. If you plan properly, a loan can work to your advantage – it’s down to you to make sure it works.