3 situations when applying for a personal loan makes sense.
Taking out a personal loan is not something to take lightly. It’s vital that, as a borrower, you consider whether it is the right decision for you. However, there are many situations where taking out personal loans online or through a bank can be absolutely the right decision. Here, we take a look at three such situations.
Firstly, what is a personal loan?
Personal loans take many forms and are available online or through a high street bank. Traditional personal bank loans tend to offer anywhere between around £1,000 and £20,000 or more on an unsecured basis. However, they are relatively difficult to get and borrowers must show they have an untarnished credit history as well as a steady income and employment record.
Luckily for consumers, there are also now a whole range of personal loans available from online lenders and challenger banks. These offer more flexible lending criteria and terms, which means there’s now something for everyone when it comes to personal loans.
Situations where a personal loan might make perfect sense
1. You need emergency dental work but you can’t afford to pay right away
In some situations, your dentist might offer an opportunity to spread the cost of the treatment, but you will usually need to offer up a significant amount of cash upfront, so spreading the cost might not solve your problem. Providing you have a regular income and are employed, and that you know you can comfortably afford to pay off the loan quickly and on time, a short-term loan might be suitable in this situation.
Short-term loans take several different forms, most commonly payday loans and installment loans. They offer you cash quickly (usually on the same day that you apply) and lenders will expect repayment to be made within a short timeframe. This means repaying on your next payday, in the case of a traditional payday loan, or over a small number of monthly installments, in the case of an installment loan.
A word of caution: Taking out a short-term loan in this situation only makes sense if you are also confident that you can afford to pay the interest charges on the loan, which are usually quite high, but are capped at 0.8% per day. Make sure you only take out the loan for the shortest amount of time you can manage, in order to minimise these charges.
2. You want to extend your house to add value
If you have the opportunity to extend your home to make it work better for you and your family, and to add to its resale value, taking out a personal loan can be a great way to fund the work. People who make a success of this type of project usually have some savings to put towards the project and are employed with a strong and steady income.
Lenders will carry out affordability tests and they will also check credit records. If you have a strong credit record you are more likely to be offered a good rate of interest and favourable repayment terms that you can easily afford.
Providing the project sticks to the budget and you repay the loan on time, you could stand to make far more money from the work than you spent on the cost of the loan, making the decision to borrow a financially sensible one.
A word of caution: If your credit record is not so good, you may find that taking out a personal loan large enough to pay for a home renovation project is very expensive. This is because rates and terms of loans are set in accordance to checks carried out on each individual borrower.
Even if a bank advertises a very low annual percentage rate (APR) on their personal loans, you might not be offered this rate. In fact, only 50% of applicants need to be offered a certain APR in order for banks to be able to advertise that rate.
3. Using a loan instead of a credit card to cover a large purchase
If you need to buy a high-ticket item, such as a new car, a new boiler, or a new sofa, finding the money from your savings isn’t always possible. Many credit card holders would automatically put the item on their card and pay it off over a number of months. However, taking out a personal loan to cover the cost and repaying over a similar amount of time is likely to cost you less in interest and charges.
A word of caution: Credit cards are generally cheaper to use than loans if you can repay the balance right away. Therefore, the credit card would be the most sensible option if you are able to clear the balance on your next payday. If your wages won’t stretch to this, interest rates on credit card balances can be very large indeed, and generally higher than those charged for personal loans of the same value. Just make sure you repay quickly to avoid paying loan interest for too long.