What to look for when choosing a loan

Thursday, 20 September 2012 03:30

What to look for when choosing a loan

What to look for when choosing a loan

From paying down debt to funding a large purchase, borrowing is something many of us will need to do from time to time in order to get some extra money when our own finances won't stretch that far. In times like this, a loan could be the best way of securing the cash you need.

However, there are certain factors to be aware of when selecting your product, so always make sure you carefully research what's available in order to pick the correct loan for you. To help you out, we have compiled a list of some of the main pointers to be aware of.

Are credit cards a better option?

When you need to get hold of some cash, the first thing you might think of is a loan, but sometimes credit cards can be the best option. Often cards have very attractive rates of interest attached to them – sometimes as low as 0% for new customers. If you think you will have no problem clearing your borrowing before such a deal comes to an end, credit cards could be perfect.

If you are struggling with debt and thinking of taking out a loan to make your payments more manageable, credit cards could still be of use. It is possible to sign up for a balance transfer card that consolidates all your borrowing so that you pay it back in one sum each month, and again these often have attractive interest rates attached to them.

Secured or unsecured?

Whether you take out a secured or unsecured loan is one of the most important decisions you will make. Often, secured products are easier to get hold of, particularly if you have a history of debt. However, where possible you should avoid them and look to alternative methods of finance.

This is because this type of borrowing is – as its name suggests – secured against something you own. This could be your house, car or another valuable possession, and it provides your lender with a safety net. Should you default on your repayments, they will be able to cover their costs using whatever the loan is secured against. If this is your house, you could be left homeless and so in a worse position than before you took out the loan.

Can you afford the repayments?

This sounds obvious but it is not unusual for people to forget about this element of taking out a loan in their haste to get their hands on the money they need. Always carefully read what interest is attached to the loan and make sure you will be able to cover this as well as the sum you have borrowed.

Some secured loan providers are known to not fix their rate of interest. You might be attracted to a product because the interest you will pay at first is low, but ensure that it will stay this way. If it follows the base rate of interest, it could increase significantly as the term goes on, leaving you to pay back far more than you borrowed.

How long will it take to repay?

Another promise that may sound good at first but that could put you at a disadvantage in the longterm is only being able to pay back a limited sum each month. This will mean repaying your debt takes longer and will result in you paying more interest.

With this in mind, it might be worth your while paying a little more in order to clear the loan faster and get out of the red and into the black. If you are struggling financially now but have reason to believe that things will improve, look for a product that allows you to pay off the debt early.

Speak to your bank

If you have been a loyal customer at your bank for a number of years, this can be the best place to start. While you will want to research the market to find the best deals, you may have room to negotiate with your financial services provider to see if they will offer you a more attractive product.

However, if this isn't the case, don't feel afraid to look elsewhere. Loyalty is something that you should be rewarded for, not pay for.



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