A Beginner’s Guide to Personal Loans

Sometimes in life, we have large expenses that require a heftier upfront payment. That’s why many people turn to personal loans, to raise funds that will cover these costs. As with any loan, this money is borrowed, which means you’ll need to pay it back over time, often with interest. The types of personal loans you can get come with different conditions that it’s important to be aware of.  Let’s break down what this might involve.

What are the different types of loans?

• Secured loans. Secured loans are guaranteed by collateral that can be seized by the lender if the borrower defaults. Examples include a house or car loan.
• Unsecured loans. Unlike secured loans, unsecured loans are not guaranteed by an asset but have a higher interest rate. An example would include a personal loan, credit card or student loan.
• Credit cards. These allow you to pay for something using borrowed money, which you then pay back later.
• Short-term loans. You can get a short-term loan for smaller amounts of money, which you repay over a short period of time – making sure to research your short-term loan is very important, given the pace of repayments.

Why is it important to pay attention to the interest rate?

The interest rate of your personal loan will impact the total amount of money you owe the lender. A high-interest rate means you’ll owe more, so make sure you do some calculations before applying. Alternatively, many lenders have online calculators that allow you to break down the interest and repayment amounts for their loans.

People can be caught out by credit card debt, so understanding the terms and conditions, whatever your personal loan type, is crucial. Otherwise, you could find yourself in a tricky situation where the debt has spiraled. Making sure you’re aware of the interest on your credit card will also help you to stay on top of your payments.

How to work out how much you can borrow

When working out much you can borrow, you need to ask yourself a few questions to avoid any risk of getting into spiraling debt.

• Can you make early repayments?

Often, the longer it takes for you to pay the money back, the more interest you’ll pay, meaning you could get yourself into very difficult situations trying to find the funds to pay them back. Assess whether you are in a comfortable position to make early repayments to avoid this.

• Can you afford it based on your current earnings and expenditure?

Try using a loan eligibility checker online or speak to an expert for advice. If you’re spending more than you’re earning, this could cause some issues further down the line.

• How much interest will you be paying?

How high the interest rate is, as well as how frequently and how soon you’ll need to make the repayments will have a big impact on your monthly outgoings. Again, there are lots of tools online to help you work out the maths and help you weigh up your options.