Factors of Personal Loans

Posted on 28 May, 2007

A personal loan, or unsecured loan, is a loan that is secured against a borrower’s personal credit rating, not against any personal property. Institutions providing personal loans include high street banks, building societies, online banks, supermarkets, as well as borrowing and lending exchanges.

Personal Loan Factors

When considering taking out a personal loan, there are a number of factors to consider before you apply.
Annual Percentage Rate (APR) - The interest rate applied to a loan is called the Annual Percentage Rate (APR). When arranging a loan, it is important to compare the APRs of different loan products to determine how competitive they are. Loan APRs will usually depend on your credit rating. It will also determine your interest rate. Lenders will quote interest rates in various ways so it is important to be aware of their calculation methods.
Interest - When you borrow money, the lender makes its profit from the interest charged. There is a wide variation in available interest rates. Your interest will be calculated on the same basis as your current mortgage. If your mortgage is flexible, your secured loan should also be flexible. Subject to the lender’s terms and conditions, you may be able to overpay and underpay. If offered as a monthly interest rate, check the annual rate equivalent. It will allow you to compare with other lenders. Interest will accumulate on an outstanding balance which will increase monthly payments; therefore your debt will still be repaid over the agreed term.
Payment Protection Insurance (PPI) - This covers your loan repayments if you cannot work due to an accident, sickness or unemployment. Because future situations are often unknown, a PPI is a good choice when applying for a UK secured loan. Make sure that the insurance being offered meets your financial needs. Many lenders will have policies stating that you cannot make a claim for up to 60 days after losing your job or getting sick.

Borrowing Amount

Most people pay off their loan anywhere from one to five years. As a general rule, the more you borrow, the cheaper the rates of interest. For large sums, many people will choose a personal loan. It is important to read any fine print clause which may contain stipulations that do not meet your needs. For instance, if you are self-employed, or on short term working contracts, you may find that the terms and conditions of the loan are not appropriate for your situation.

Considerations

Banks, building societies, and other lending institutions aggressively compete for your business. Just because a lender says it has a special offer, it does not mean it is the best offer. Shop around as extensively as possible. Budget for the amount borrowed and balance it against how much you can afford to repay every month. A personal loan is usually agreed to be repaid over a set period with scheduled monthly repayments. You have to prepare for the extra monthly expense.