Unless you were born sucking on a silver spoon and spent your early life in cashmere nappies, it’s likely that you’ll need to borrow money at some point in your adult life. This may be so you can realise your dreams of buying a house or car. You may just wish to consolidate any existing debts, or simply improve your financial situation.
Like all borrowing options, there are pros and cons to personal loans. Much depends on your private circumstances. Personal loans offer individuals a lot of choice, but other options may be better for you financially.
When deciding if a personal loan is right for you, it’s a good idea to work out precisely how much you need to borrow, and for what purpose. When these things are clear you’ll be in a much better place to work out which method of finance is right for you.
Navigate your way through the fug of personal loans and let the Guru be your guide.
Popular Reasons for Taking a Personal Loan
With any loan, remember to note down the total costs before you commit to anything. All loans will have an interest rate advertised. However, the annual percentage rate (APR) advertised will be available to 51% of people accepted for the loan, meaning 49% will be offered a less attractive rate than that advertised.
Check also for additional fees that may be applied when setting up a loan. These may include early redemption fees – fees you incur if you pay your loan off sooner than agreed – and arrangement fees, sometimes applied by lenders for setting up a loan.
Benefits of a Personal Loan
Personal loans are also called ‘signature loans’. There are many reasons why some individuals prefer them as ways of raising finance over other means.
- Personal loans are often unsecured
- Personal loans offer a multitude of borrowing options
- Personal loans can be used for lots of purposes
Personal loans are often unsecured
Whilst it is possible to arrange a secured personal loan, many personal loans are unsecured. This means that you do not have to put up your home or car as collateral. In the case of a secured loan, assets would need to be put up to secure the loan. This means there is a chance you could lose your assets in future if you are unable to pay the loan back as agreed with the lender.
Personal loans offer a multitude of borrowing options
Although much depends on the individual applying for the loan, personal loans often offer more options than other ways of raising finance. A borrower’s credit history will be taken into account, but in general terms, when compared to other borrowing methods, personal loans generally have a wide range of amounts, interest rates and payback periods to negotiate.
Personal loans can be used for lots of purposes
You would generally need to specify a reason with a lender for you to apply for a personal loan. This may include needing monies for home improvements, a car, a wedding or a holiday. You can even use a loan for debt consolidation – putting your debts together into one regular payment. Some apply for personal loans when unforeseen expenses crop up, such as emergency vet bills.
Alternatives to a Personal Loan
Personal loans are not for everyone. For some there may be better ways of raising capital, meaning less debt and less chance of getting into more debt overall. Alternatives to personal loans include the following:
- Credit Cards
- Mortgage Refinance
- Pay Advance
- Budgeting Loan
- Local Welfare Assistance
A credit card has similarities with a loan, in that it provides an alternative way to loan money from a lender. In simple terms, those who use credit cards are entitled to pay off the balance of any monies spent on the card. Failure to do so would see the amount you have loaned accrue interest.
An overdraft is an agreement between you and your bank. It allows you to withdraw money that you do not have in your account. The amount you can withdraw would need to be decided by your bank prior to your overdraft being accepted. A borrower would generally be charged a fee for the privilege of being allowed to go overdrawn. Please note, there is such a thing as an ‘unplanned’ overdraft, where a borrowed goes overdrawn but they haven’t previously had the overdraft authorized by their bank, however you should refrain from utilizing these as they may come with very high fees.
Refinancing a mortgage may give you a better deal on your monthly mortgage payments. This could mean lower payments or a better interest rate. Depending on your circumstances, this may give you more disposable income every month, eradicating the need for a personal loan.
Some employers will offer a pay advance to their employees. A pay advance is simply that – an employee being paid future earnings in advance. Like any loan, this would need to be paid off in future, either in a lump sum or instalments, depending on your agreement with your employer. Please note, this option is usually at the firm’s discretion so do not assume that your request for a pay advance will be approved.
If you have been receiving income support, pension credit, jobseeker’s allowance or employment & support allowance, you may be entitled to a budgeting loan. These are designed for people to purchase essentials when they are on low incomes through either short or long term unemployment.
Local Welfare Assistance
You may be able to claim assistance from your local welfare department. As with a budgeting loan, local welfare assistance is intended to help those on low incomes, so individuals may be able to claim for food, clothes and other essentials. You may be able to claim local welfare assistance if you are on jobseeker’s allowance, employment & support allowance, pension credit, income support or universal credit.