Considering if a personal loan is right for you?

If you’re considering a personal loan, it can be difficult to know which one may suit your circumstances.

Whether you’re looking to buy a car, pay off existing debts, plan a wedding or renovate your home, there are loads of reasons why you might be considering a personal loan.

As with any loan, it’s important to make sure you’ve done your research and considered your budget. So here are a few things to consider before you apply.

For the most part they can be used to help fund any additional expenses that arise. Things such as a car, wedding, renovation, holiday, medical bills and debt consolidation may all have you considering a personal loan specifically to help you pay for them.

Personal loans can include fixed or variable interest rates and can have short term or longer repayment terms, often between 12 months and seven years, depending on the loan agreement and lender.

Personal loans aren’t a one-solution-for-all option so depending on the lender, there may be a few types of personal loans to consider depending on your own situation.

This type of loan allows you to borrow money by using an asset as security against the loan (like a car or home). This may mean you can borrow at a lower interest rate compared to an unsecured loan, which may make your repayments more affordable.

Unlike a secured loan, this doesn’t require any collateral, however they tend to charge higher interest rates and have higher fees. If you fail to make payments, the lender can still take action against you for defaulting so they are by no means consequence-free if you don’t make your agreed repayments on time.

On the plus side, unsecured loans may be easier to apply for and may offer lower interest rates than a credit card.

It’s a type of personal loan that lets you combine your other debts, such as a credit card or car loan, into a single loan. This may allow you to pay them off in a single payment and possibly at a lower interest rate. Before you decide on a debt consolidation loan it’s important to consider that you could end up lengthening your short-term debt into a longer loan which may cost more over the years.

This allows for a certain amount of money to be available in case you need extra funds to manage your cash flow. Sometimes a line of credit or overdraft) may be cheaper than using a personal loan because you only need to repay what you’ve spent (usually with interest), depending on your circumstances. Overdrafts are a way of making sure money is there if you need it, for example, in case of emergency. In general, deciding between an overdraft and a credit card depends on a variety of factors, such as the fees involved and how much you’re borrowing.

All personal loans come with either a fixed or variable interest rate. A fixed rate loan means that repayments and the interest rate will stay the same for the duration of the loan. Alternatively, a variable rate personal loan means your interest rate might increase or decrease over the lifetime of your loan.

Fixed rate loans may also have slightly different conditions and fees. For example, it’s more common for a fixed interest rate loan to charge a break fee for paying the loan off early.

Variable rate loans might offer more flexibility however the loan’s interest rate can increase or decrease based on changes in the lending market. This may result in higher or lower repayments compared to when you started.

While you’re doing your research and before applying, talk to a range of lenders to find out which interest rate and loan terms best suit your particular situation. All lenders will vary, so it can pay off to shop around and compare.

When shopping around for a personal loan, you should not only compare the interest rates but also the comparison rate which helps provide an indication of the true cost of the loan including common fees within a percentage rate.

The comparison rate is calculated using the interest rate and common fees and charges that may apply to the loan, such as application or establishment fees, and is usually displayed beside the interest rate. This can help you easily compare lenders on more than just the interest rate.

Some personal loans can be quick and easy to apply for and usually provide the money in a lump sum, making it easier to make a large purchase or consolidate debt. If quick access to the funds is important to you, this might be something to consider.

For an unsecured personal loan, no asset is required to secure the loan and, generally speaking, online personal loan approval times can be relatively quick.

Finally, online personal loans will often come with a lower interest rate than a credit card and can usually still offer some flexibility in terms of loan purpose and repayment terms.

Remember, personal loans are not without drawbacks though and they are not suited for every individual or situation. Some of the cons to consider before taking out a personal loan can include the interest rates and additional fees. If you have poor credit or a lot of other debt, the interest rate on a personal loan might be higher or it may be harder to have your application approved.

Personal loans also may come with a range of fees and penalties that can quickly increase the cost of borrowing. For example, some lenders charge break fees if you pay the balance off before the end of your loan term.

Personal loan offerings will vary from lender to lender in terms of repayments and costs so it’s important to compare all aspects of a loan including interest rates, any fees associated with the loan as well as the loan term and repayment options before you make a decision.

Remember a lower interest rate isn’t always the best indication of a good deal. For example, if you choose a longer repayment period, even though the interest rate is lower and your repayments are lower, you’ll pay more in interest over the course of the loan.

It’s important to consider which is better suited to your circumstance. Be sure to research the terms and conditions of the loan you're considering to fully understand the fees that might be involved before applying.

Compare and ensure you understand the terms and conditions of the loans you’re comparing to better understand which one might be suited to your personal circumstances.