In the UK, you have a variety of ways to borrow money. There are payday loans, short-term loans, personal loans, and more. As a first-time borrower, determining the loan that works best for you can be challenging. It is important you know all of the options available to you, so you make the correct financial decision. Everyone needs a loan for a variety of reasons so not every loan will work for you.
On this page, we’ll discuss personal loans in-depth. You’ll learn what they are, how they work, along with alternatives that might be better for you.
What is a Personal Loan?
A personal loan is a loan you can receive from a traditional lender like a bank or credit union. They come in a variety of amounts, and some people even use them to pay for big-ticket items like a car. Personal loans are unsecured, which means the lender doesn’t require collateral. With secured loans, you have to put up your car or something else to help the lender mitigate their risks. Even loans from banks for mortgages require the borrower to put up the deed to their home.
Lenders will look at a person’s credit report to determine whether or not they qualify for the loan. To reduce their risk, they usually only lend to those with good to great credit scores. Even so, some lenders might choose to work with people that have bad credit and the APR will reflect their risk.
Why do people need personal loans?
People choose personal loan as well as others for a variety of reasons. Some people might choose them to pay for an unexpected expense like car repairs. Others might need them to tide over until their next pay check. Whatever the case, always make sure you use them responsibly, and never take out more than you can afford.
How do you qualify for a personal loan?
Every lender is different, but each will look at the same factors when deciding whether to approve a loan. They will often run a credit check, which is a compilation of an individual’s financial history.
Typically, a person’s credit score must be between 640 and 750 to get a personal loan. This shows that they have a history of paying their bills and keeping debts low compared to credit. Also, lenders will look at a person’s debt-to-income ratio. This shows how much debt they have compared to the amount of money they make. If the ratio is low, it means that they should have enough income to cover the loan payments.
Common Features of Personal Loans
Not every loan will be the same and will differ depending on the lender and your personal situation. However, all personal loans feature a few things in common.
First, the loans are typically set at an interest rate around 8.5 to 18% depending on the person’s credit rating. This can change so be sure to do your research ahead of time. Also, personal loans typically have a fixed payment schedule. Borrowers must pay the exact amount each period or could be at risk of defaulting.
Personal loan applications are rated using letters such as A, B, or C. Borrowers with an A rating will typically pay the lowest interest rates while C will pay more. Each lender will have different interpretations of these ratings. One might consider you a B while another might consider you an A. This is why it’s important to shop around and compare different loans and lenders beforehand.
How to Compare Personal Loans
If you were to apply and accept the first personal loan option, you might miss a better opportunity. You should do your research beforehand to make sure that you are making the correct financial decision. Comparing personal loans can feel confusing at first, but if you know what to look for, it can be easier. First, you should compare the interest rates of each of the loans you consider. Look at their estimations to get a feel for what to expect, but keep in mind it might change.
Then, you should also look at the fees that each lender charges. Some will charge an arrangement fee for example and others won’t. Ideally, you shouldn’t have to pay too many fees for your loan. Also look to see if you can repay your loan early without penalty. Some people want to pay off their loan as soon as possible, but lenders aren’t always open to this.
As a word of caution, whenever you apply for a loan, it goes on your credit report. Applying for multiple loans in a short period can actually damage your score. This is because people that seek out new forms of credit in a short time usually have financial troubles. Their score will reflect this. Instead, do your research before you apply so you can know if you have a chance of receiving the loan.
Are there any risks with personal loans?
As with any loan, there are always financial risks. Many people choose to take out a loan because they are in desperate financial need already. If they fail to consider the interest payments, they can have difficulty paying it back. Before you choose to take out a loan, always think it over carefully. Why do you need the loan? Will you be able to afford the payments? Luckily, tools such as a loan calculator can help you plan beforehand to know the exact value of your loan.
Using a Loan Calculator
If you go to a lending website like Moneyboat, you can use a convenient loan calculator to answer your questions. By using this handy calculator, you can see exactly how much your loans will cost you in total. You can choose the different payment periods along with the loan amount and see how the interest changes. By using this calculator, you will have a better idea of the total cost of your loan before you apply.
What are the alternatives to personal loans?
Personal loans might work for some people, but for others, they might need more flexibility or different amounts. Luckily there are many different types of loans and financing options available on the market for people to choose from. Here are a few of the most popular loan types in the UK:
Short Term Loans
Short-term loans are small value loans that borrowers can pay over a set period. This is seen as an advantage since borrowers won’t have to pay the loan all off at once. This way, borrowers won’t have to overextend themselves trying to repay their loan. Short-term loans are similar to payday loans in a few regards. Most notably, the interest rates are typically higher than normal personal loans. This is because some lenders might work with borrowers that might pose a financial risk to them. Borrowers should never take out more than they can afford to reasonably pay back. If they don’t pay the loan back in time, they could run into a host of financial troubles. Make sure that you work with a lender that is transparent about their services and products, so you know beforehand.
Payday loans are another form of short-term loans that people use when they need to pay for an expense. They don’t usually come in high value forms, and are similar to the amount of a typical pay cheque. Lenders market them as a way to tide someone over while they wait for their next months salary to arrive. The interest rates for payday loans are usually very high since lenders work with riskier borrowers.
Borrowers can’t pay their loan off in instalments and instead must pay it all at once. This can be stressful for some people, while others have no issue making the payment. It all depends on the individual’s personal financial situation. Borrowers should be careful of “rollover loans.” Lenders describe it as a solution, but it can really hurt someone’s finances if they aren’t careful. If the borrower can’t pay their loan off in time, they can roll the loan over to the next month. They will still have to pay the interest for the first month, however. This can quickly spiral out of control, so it is crucial you are careful and make well-informed decisions.
Many people choose to use a credit card to pay for everyday purchases. They can offer rewards like cash back or airline miles. Many people also use credit cards when they need financial assistance and treat them as loans. They aren’t difficult to get, and if your credit score is good, you can get a decent credit line. The credit line is the set amount that someone can spend and might change over time. Someone’s credit line largely depends on their credit history and credit score.
Credit cards charge interest like a loan, although it is typically lower than short term and payday loans. Borrowers can avoid this interest if they pay their balance off in full each month. Some people don’t do this, however, and only pay the minimum. If they do this, the interest will apply to the remainder of the balance. This can add up over time which can lead to a number of financial struggles. Always use credit cards responsibly and make sure that you only buy things you know you can afford.
Things to Consider When Borrowing
Whenever you look to apply for a personal loan, always make sure you qualify. Whenever you apply for the loan, it will go on your credit report. Having too many credit inquiries can hurt your credit score, hurting your future chances. Make sure that you also compare the different options available to you before signing any papers. Lenders may prey on misinformed people, so make sure you know as much as possible.
Never forget about the interest rate on a loan when weighing options. Even if it might not seem like much, it can add up over time as you pay off the loan. Also, never take out more than you can afford. Some people might only need £500 but will go with a £1,000 loan since they’re already there. They might think it’s harmless, but the extra costs aren’t worth the extra stress.
Working with Moneyboat
At Moneyboat UK, we strive to provide each of our customers with the professional and friendly lending services they deserve. Our customer service team is unmatched by anyone in the industry. We are available on weekdays from 8:30 am to 5:30 pm to answer any and all of your questions. We’ll gladly talk about your options, and we’ll never push you in a direction you aren’t comfortable with. Whenever a problem arises, feel free to talk to us, and we’ll work to come up with a solution.
We are your flexible short-term loan option in the UK. We offer custom loan solutions and instalment periods that fit your needs. You won’t have to pay everything at once, which can make the burden less stressful. First-time borrowers can get a loan for as much as £800. If you’re a returning customer, we offer loans up to £1,500.
We are 100% transparent with all of our loans and our services. We don’t hide behind terms of service contracts and will happily answer any questions you have while applying. We treat our customers with the respect and care they deserve. We want our family and friends to use our services, and when you work with us, you are our family. Trust us to be your number one lending solution in the UK for years to come!
Visit our home page to learn more about our loans and services. While you’re there, be sure to check out our loan calculator to see exactly how much your loan will cost. We want to work with well-informed customers, so we provide the tools you need.