No matter the amount or purpose of a personal loan, it is imperative to understand that borrowing money is a major financial move. One mistake and you might face years of financial consequences. One wrong move and your credit score could get hurt resulting in a domino of financial troubles. Avoid all that by knowing exactly what you are getting into. Whether this is your first time or you’ve done this before, here is a quick guide to personal loans today.
What are the types of personal loans?
Personal loans, as the name suggests, are financial instruments designed to meet a wide variety of personal loans. From overdue bills to rent payments, medical expenses, home renovation, vacation and money more, personal loans come handy for many consumers.
Before you go ahead and sign any dotted line, however, you need to understand that there are two major categories of personal loans, which are secured and unsecured loans. Secured loans are loans that require a security typically your home or vehicle. Unsecured loans, on one hand, do not require any collateral therefore easier and faster to avail.
Common examples of secured loans in the UK include mortgage loans, car loans and home equity loans. Since the loan is secured against a security, these types of loans offer larger loan amounts and longer repayment terms. Approval may take time seeing that lenders have to run credit checks and other types of assessment processes.
As for unsecured loans, anyone with a fair credit score can avail the financial products. Unsecured loans are available from major banks, high street lenders and even peer to peer companies. To cater to those with a bad credit history, payday loans are unsecured loans advertised with a promise of super quick cash.
How much do personal loans cost?
The cost of a personal loan varies from type to type. But in general, secured loans are cheaper because the loan is secured against an asset in the first place. This means the risks for lenders are lower allowing them lend larger sums of money at longer repayment terms and at a price most borrowers can afford. Unsecured loans, on one hand, entail higher risks for lenders. They compensate for said risks by raising the financial product’s interest rates. In addition, they also include hefty fees and charges.
Even if more costly than secured loans, unsecured loans remain a viable option for borrowers because it can still be cheaper than credit cards. It’s a matter of looking for the right type of unsecured loan from the right lender to meet your personal financial needs.
When to take out a personal loan?
Reasons for taking out a personal loan vary from borrower to borrower but the most common include paying for overdue bills, car repair, medical expense, vacation and other personal investments. What ever your reasons maybe, in the spirit of responsible borrowing, it’s very important to borrow with caution. That means following the simple rule of thumb to borrow only what you need and what you can afford every time. As long as you can afford the monthly repayments, you have nothing to worry about. Just make sure to pay your dues on or if possible before your due dates to avoid any major financial consequences that most often than not will only lead to headaches.
If you have bad credit and you hope to take out a bad credit loan, make sure you put in extra time for research. Investigate the interest rates and hidden fees in particular so you won’t get stuck with a very expensive loan.