A personal loan can be a helpful tool in covering some of life’s unexpected costs. With a personal loan, borrowers receive a lump sum of cash in exchange for steady payments over the course of several months or several years. In addition to paying back the amount borrowed, interest charges are added to the loan balance. While personal loans can be a cost-effective way to get access to cash, not all personal loans are best suited for every borrower
Before taking out a personal loan, it is crucial to know what you’re signing up for both now and in the future. Borrowers are on the hook for monthly payments for the full length of the repayment term, and if this doesn’t fit well into a monthly budget, your financial well-being could be at stake. To ensure you’re getting the best personal loan for you, start by recognising what you may be eligible for from available lenders.
Understanding Your Eligibility
Getting a personal loan requires more than a financial need. Lenders want to know you are a responsible borrower and that you have the means to repay what you owe. The general guidelines for getting a personal loan include:
- A strong credit score and credit history
- Steady income or employment
- No negative marks on credit like missed payments or high credit use
Through the application process, a lender will determine if a borrower is a high or low risk applicant. For low-risk borrowers, such as those with regular income and a high credit profile, lenders offer the best possible loan terms. These terms include a low, likely fixed rate, and a repayment term that can be as short as one year or up to five years. The maximum amount a borrower can receive as a personal loan ranges from lender to lender, usually not exceeding £25,000, and low-risk borrowers may have access to the highest possible loan amount.
High-risk borrowers, on the other hand, may be in more of a need for a personal loan. However, a lender may decline an application if credit has been an issue in the past. If not a decline, a lender could also charge a far high rate or shorten the repayment term, making a personal loan less affordable. When low-cost personal loans are not available, borrowers may turn to alternatives such as payday loans.
Steering Clear of High-Cost Loans
According to a finance expert with Money Pug, a website used to compare payday loan options, a high-risk borrower has a much easier time getting a payday loan than they would a traditional personal loan. A payday loan does not require a credit check. Instead, lenders of payday loans look to income as a source of credit. If borrowers have a paycheck, a payday loan is almost always approved. However, the convenience of a payday loan comes at a cost.
Payday loans are risky endeavors because they typically come with exorbitant rates. Topping triple-digits in some cases, payday loans can cost far more than a traditional personal loan, and they have a short repayment term. Before getting caught up in the ease and speed of a payday loan, borrowers need to take a close look at what they are getting into. Many people end up in a cycle of debt that is hard to get out from under, paying off one payday loan with another. If you cannot avoid a payday loan altogether, at least do the research on how much you will ultimately pay on the loan and if the short repayment term makes sense for your budget each month.
Working with the Right Lender
Whether a borrower qualifies for a traditional loan or a high-risk payday loan, understanding what the lender is offering is crucial to getting the best loan available. Lenders may offer different rates, including fixed and flexible options. In many cases, flexible rates are not as cost-effective as fixed because they fluctuate over time. When the interest rate market rises, so goes flexible rates, leading to a higher cost of borrowing and potentially a higher monthly payment. Be sure the lender selected explains which type of rate you are getting, and what your options are between fixed and flexible rates.
Borrowers also need to be cautious of lenders that seem too good to be true. Personal loans may come from traditional banks or online providers, but in any case, be sure to check out the company before signing on the dotted line. This means searching for reviews of the lender online, or researching the legitimacy of the company elsewhere. Legitimate lenders will provide certain documents for a borrower to review before funding a personal loan, and they will likely ask for verification of a borrower’s income, identity, and credit before approval. If anything seems off with a lender, work with a different provider to get the personal loan best fit for you.