Most people, at some time or other, find themselves needing a loan to make a major purchase. There are many different types of loan available, but apart from property mortgages, most purchases are made with a personal loan from a bank or finance company. The lenders want your custom and will make attractive sounding offers but, because there are there large sums involved, what appears to be a small difference in the offer can end up making a big difference to what you end up paying. It is worth researching the market carefully before you put your signature on the bottom of that application.
What Is a Personal Loan?
A personal loan is an arrangement whereby you borrow a sum from the bank to make your purchase. You agree to pay it back over a certain number of months (36 would be a normal sort of period) at an agreed interest rate. The bank does a calculation to work out the amount you will pay each month, and by the end of the period both the capital and the interest are paid off.
Personal loans normally fix the interest rate for the whole period and your payments will be the same every month, so that you know exactly where you stand. It is sometimes possible to have a variable rate which moves up or down depending on the economic climate, making it more of a gamble. Some loans are also flexible allowing you to miss some payments in return for increased payments during the rest of the period.
Check Your Rating
Before you start applying for a loan, you should check your own credit report. You can do this by contacting one or more of the main credit reporting agencies. It is important to know this information for two main reasons:
- The lender will have a scale, based on credit reports, which will determine which applications will be accepted and at what rate. If you don’t know your report you will waste your time applying and will not have a good negotiating position.
- If you apply for a loan and are turned down, this will be bad for your report. Your report will also suffer if you make a number of applications over a short period.
If you find that your report is poor, it will be to your advantage to wait until it improves (if you possibly can) before asking for a loan.
When deciding between deals, you have three figures to compare:
- What is the actual interest rate you will pay? The easiest way to compare this is by looking at the annual percentage rate (APR). This may differ from the ‘headline’ rate and provides a basis for comparing different sounding deals.
- How much will you end up paying in total? This is easily calculated by multiplying the monthly figure by the number of months. You can divide it into the capital (the amount you take away on day one), the interest, and any arrangement fees.
- How much will you pay per month? Generally, your total cost will be greater if you have a longer repayment period, but you need to balance that against how much you can realistically afford each month. If you get into difficulties and start missing payments, there will be complications.
Looking for a Loan
Your best loan may depend on what you want the money for. Some lenders may favor particular purchases. For instance, if you are planning to buy an automobile, you can easily conduct online research about the car loan rates available from different lenders.
It is rarely a good idea to accept a dealer’s offer when you make a big purchase. Dealers take a good commission if they can sell you a finance package and you should not accept it until you have compared it to other deals available, however many sweeteners may be thrown in.
It may be sensible to start with a bank you already use. They will know more about your financial position than anyone and will often be happy to give you informal advice.
Whoever you are dealing with, you should always be fairly sure that your application will be accepted before you make it formal.
Looking for a loan can sometimes seem like entering a minefield. However, by knowing your own situation clearly, shortlisting the deals that would be available, and making a comparison between the amounts you would pay, you should be able to arrive at a safe place.
Molly Osborne works in the banking/finance industry and is able to offer some top-tips to consumers when it comes to mortgages, loans and credit cards.