Choosing a personal loan

Any personal loan will involve an agreement – a contract between you and the lender that binds you to the terms of the loan. This agreement could be electronically or physically signed, but either way it will be a binding agreement. Breaking that agreement will always have serious financial and/or legal consequences so, before you take out a loan of any kind, always consider three simple things:

1. Do you need a loan?

Allow yourself some time to consider whether you really need a loan. Is this something that could be put off or can you go without it completely? For example you could make some savings by switching to cheaper utility suppliers or instead of buying books or DVDs you could borrow them from the library. Think about where you could trim the fat from your budget before you make the decision to take out a loan.

2. Shop around for a loan that suits your needs

Different types of loans suit different purposes – you wouldn’t buy a new kitchen with a credit card and you wouldn’t take out a five-year loan for a holiday! Companies such as uSwitch.com or BeatThatQuote can offer an extensive comparison loan service that will give you a good overview on what’s on offer in the marketplace. Do your homework before you decide to take up a loan; this will avoid you ending up paying more than you need to or having disadvantageous repayment terms.

3. Can you afford to repay the loan you’re considering?

If you are not sure you can afford to repay the loan, don’t take it in the first place. Look at your personal budget, the length of the loan being offered, the actual cost of repayments and check for any small print about hidden charges or penalties. Some lenders make it harder than others to establish the actual cost of repayments, but it’s always worth taking the time to find out and then decide if it’s within your means or not. A helpful tip is to be sure you are looking at the TAR - total amount repayment instead of the APR - annual percentage rate, when considering the affordability of a loan.