Best Loans Articles

Most individuals living in the UK at the moment have, or have had at some time in their past, a loan of one form or another. Whether this is just a small unsecured personal loan, a large secured loan for a major purchase or debt consolidation, or a mortgage or home owner loan, the majority of people are familiar with loans and what they entail and therefore largely take them for granted.

But with the recent credit crunch and banking crisis, taking out a new loan of any kind is not just quite as straight forward these days as it used to be. Banks and building societies are struggling with their own finances and in many cases, do not have the money themselves to offer as loans and following the credit crunch many lenders are far more careful about who they are prepared to lend money to.

A large number of individuals in the UK who previously considered themselves credit worthy and could easily obtain a loan or finance prior to the credit crunch may now find that their situation has changed, in many cases through no fault of their own, and they may well struggle to be accepted for a personal loan as effortlessly as they have done previously.

For someone who is considering taking out a new personal loan, it is worth taking a little more time and effort over the process before they apply. That way they will be more prepared for any details required by the loan company at the outset and therefore be less likely to be disappointed.

The first thing to consider for a potential borrower is whether or not they actually do require a personal loan. This may seem like a strange statement, but someone may actually be better off if they used alternative methods of funding.  This could include using existing savings which are not receiving high amounts of interest at the moment, using a low rate or zero per cent credit card, or borrowing the money from family.

Once it has been established that a personal loan is the best way forward for a borrower, the applicant needs to start doing some homework prior to their application. Firstly they should work out exactly how much they need to take out as a loan. There is no point borrowing more than you need to, it only means additional interest and loan repayments.

Many lenders charge lower interest rates on larger loan balances. Although it could be beneficial for someone to borrow slightly more in order to obtain a lower rate, this should be approached very carefully. If someone were to borrow a lot more than they required, just to get a cheaper loan rate, they would almost certainly end up paying more than they thought they were saving.

The majority of lenders work on an affordability basis when it comes to deciding if a potential borrower can afford the loan they are applying for and be able to keep up with the monthly loan repayments. It is therefore important for a borrower to draw up a budget planner prior to their application. This should include their income from all sources, their outgoings on a monthly basis, such as mortgage and loan repayments, utility bills, food and essential expenses, as well as luxury items. This should them give them their disposable monthly income and a better idea for both themselves and the loan company as to just how much they can afford each month in loan repayments.

Another good idea is to get a credit report prior to applying for a new loan. This shows details of a person’s credit rating as well as any committed outgoings, such as existing loan repayments and whether these are all up to date. The credit report will also show up any missed payments, arrears and County Court Judgements (CCJ’s), giving the individual an opportunity to catch up any outstanding payments or clear any CCJ’s, thereby improving their credit rating.

It may be tempting to take a new personal loan out over the longest time period possible, as this will significantly reduce the monthly loan repayments. However, the longer the term of the loan, the more interest will be payable and therefore the cost of the loan will work out much higher over the full term. Although it is important to consider affordability, a borrower should take a loan out over the shortest period possible, as this will reduce the overall cost of the loan as well as reducing their debt quicker. Remember, you never know what’s round the next corner!

If the new loan is for debt consolidation purposes, it is important to ensure that the rate chargeable on the new loan is lower than those of the debts to be consolidated, otherwise what is the point of the debt consolidation loan? Likewise, the term of the new debt consolidation loan should not exceed the term of the previous debts, or once again you could easily end up paying more than you would have done on the original debts.

Once the money arrives in the bank account from a debt consolidation loan, it is essential to repay the outstanding debts it was meant for and do so straight away. This may seem like a redundant statement, but there have been many cases where, once the borrower sees the money in his or her bank account, the prospect of a nice holiday or new car seems very attractive! This is irresponsible borrowing at its worst and yet it happens all too often. Similarly, where credit card bills have been repaid, the borrower should destroy the cards, or at least reduce the credit limit to a minimal amount for emergency purposes only.

It is also important for a potential borrower to shop around for the best loan deal they can get. Many people assume that one loan deal is pretty much the same as any other loan deal. This is definitely not the case and before anyone settles for the deal offered to them by their local bank, they should do some research in to alternative loan providers. This has been made much easier in recent years by the vast number of price comparison websites which exist for this very purpose.

Other things which a borrower should take into consideration when applying for a new personal loan are things like fees and other charges. A particular loan deal may have a low interest rate, but if there is a large arrangement fee, this will increase the overall cost of the loan, particularly if the fee is added to the loan. The APR (Annual Percentage Rate) will give a true comparison of costs between different loans and this will be shown on the illustration.

If it is the borrower’s intention to make overpayments on their loan or repay the debt early, they should check to see if there are any repayment penalties.  If there are, it could be more beneficial to opt for a loan with a slightly higher interest rate, but no penalties.

Borrowers should also consider suitable protection for their loan. This could include life cover, critical illness cover, income protection or Payment Protection Insurance (PPI). This can be a complicated area and everybody’s needs and requirements are different, but it is important to do something. If in doubt, take advice from a financial adviser.

In conclusion, by following these simple steps, a potential borrower is likely to be better informed and better equipped to obtain the most suitable personal loan to meet their particular needs. Of course it still does not guarantee that they will be accepted for a loan, but they will stand a better chance and could potentially save a lot of money in unnecessary interest payments.