Most of us don’t have the extra cash we need to purchase new appliances, a new car, or to take a vacation. Instead, most of us have to borrow the money – usually as a personal loan.
A personal loan lets you borrow up to $25,000 over a term of 1 to 5 years. The interest rates are fixed through the duration of the loan’s term, but this can vary from one lender to other, which is why it is so important for you to shop loan rates before signing on the dotted line.
Calculating the cost of your loan
The way personal loan is structured makes them a solid option if you are looking to fund a major purchase, because you know in advance exactly how much you can borrow, the interest rate you will be charged, and the term you have. That means you can calculate the exact cost of the loan. Let’s say you borrow $5,000 over a 3 year period at 7.1%. Your monthly payments will be $154.11, and the total cost of the borrowing will be $547.96.
Lower your monthly payments
If you lengthen your loan’s term you will lower the monthly payments. For example, the monthly payments on our $5,000 loan now drop to $98.72 if we extend the term of the loan to 5 years. Lower monthly payments may look attractive, but the negative component of a longer term is that your total cost of borrowing will be more (you pay less each month, but you pay for more months).
Using the example of $5,000 over five years, it would cost you £923.20 in total with the interest at £375.24, which is more than with the same loan taken for three years.
Clear your debt early
You can save money on interest if you are able to pay your debt back earlier that the loan’s term. You do need to watch for any penalties. If you took out the loan prior to February 2011, there is generally a fee for early repayment. Today, the fee is no longer applicable, so you will not have this issue with a loan you take now.
Higher loan rate
Generally, lenders will charge higher rates for smaller loans. So, sometimes borrowing a bit more, especially if you are near a rate threshold, is a wise decision. For example, you might pay an interest rate of 9% on your loan of $9,000, but you would pay only 8% on a loan of $8,000, so you could be better off taking the larger loan.
Compare loan rates
Watch out for the headline. Advertised rates for some personal loans can be very tempting, but not everyone qualifies for these. The advertised rate needs only to be available to 51% of the successful applicants. In other words, that means that half of the applicants are going to pay more.
An internet application lets you fill out your application in the privacy of your home and when it is convenient for you, away from peering eyes.
Always take the time to compare loan rates to ensure you are getting the best rate possible. MoneySupermarket’s free online services offer details of hundreds of different loans from the country’s leading lenders, which includes banks and other financial providers.
You don’t have to contact your bank, but keep in mind your that own bank is likely to give you a better rate than the competition, especially if you are a “good” customer.
Usually, you can apply for a personal loan online, quickly and conveniently gaining access to your money. However, loan terms and conditions are not always easily understood, so some people still like to have the face-to-face contact. If your financial situation is complex, directly going to the bank or another lending institute to apply for your loan may be easier.
When you’re struggling with debts
If you find yourself not able to make your loan repayments, you should contact the lender immediately so that they could draw up repayment plan that would work for you and them. You can also get in touch with a free debt advice service like StepChange Debt Charity or Citizens Advice.
Personal loans are not secured, so the lender cannot automatically repossess your car or home if you fall behind making your loan payments. However, you still could find bailiffs at your door and face the threat of legal proceedings.
These days, credit isn’t as easy to come by, as many lenders are much more selective about whom they lend money to. If you have no luck at the bank, try “peer to peer” lending, where you link up with someone else who is willing to lend you money. You could also contact your local credit union or consider a secured loan.