In the current climate, a personal loan with a good rate of interest can be highly beneficial. Whether you need to cover emergency repairs or invest in your future, however, there are some basic factors you need to account for before you take out a personal loan. There are many options out there when it comes to lenders; online lenders like Upgrade offer more flexibility than bank loans and are often better suited to those with poor credit. You can find Upgrade loan reviews online if you are interested, but first, let’s cover the basics of borrowing.
The Types of Personal Loan
Personal loans, as you may know, are not like certain larger loans, such as mortgages, or personal finance lines, such as credit cards. Personal loans come in two basic forms:
Secured loans
Secured loans are personal loans backed up by an asset, such as a car or a property. These assets are considered collateral for the loan. If the repayments are not made, the assets will be taken. As such, you can often get larger secured loans at lower rates of interest.
Unsecured loans
Unsecured loans are loans given based on the creditworthiness of the borrower. These loans are not attached to collateral and, as such, tend to have higher interest rates. You may also be offered a lower overall amount of money.
There are also lenders who specialize in offering credit to those with bad credit scores or a poor credit history. If you have a lot of debt already, or you have a low credit score, the kinds of loans you can get will be limited and the interest rates you are likely to be offered may be higher.
Understanding Interest Rates
When borrowing money, interest rates are important and understanding the actual APR (annual percentage rate) your loan carries can give you a better idea of how much you will actually repay.
For example, if you borrow £1,000 at a rate of 20% and you do not pay any of that debt within a year, you will accrue £200 of interest. This interest will be added to your statement on a monthly basis. In short, the quicker your pay back your loan, the less interest you will pay.
You should also keep in mind that the APR advertised may not be what you are offered; APR must be available to at least 51% of those who are offered credit. You will only be offered the advertised rate if you meet certain criteria.
Eligibility for Loans
Before you can be offered a loan, potential lenders will check that you meet certain criteria. Lenders will consider your credit score, employment status, stability of employment, your income, and any pre-existing financial responsibilities you may have, such as debts, rent, and car payments. As such, those who have high debts already, or those with unstable employment, may find it hard to secure a loan with a good rate of interest.
Once creditors have assessed your creditworthiness, they will decide whether to offer you a loan or not, how much they will offer, and what rate of interest will be applied to any loan you accept. Each credit check will impact your credit score, however, so be careful how often you apply.
Soft vs. Hard Credit Check
When it comes to applying for a personal loan, there is one tool you should not overlook: soft credit checks. Many online lenders offer this feature, and it is a good way to protect your credit score when seeking a loan, but what is a soft credit check?
In simple terms, a soft credit check gives you an idea of how likely you are to be offered a loan and the kind of terms you can expect, without leaving a mark on your credit report. This is important. You see, hard credit checks damage your credit score, especially if you undertake many in a short period of time.
However, a positive soft credit check does not guarantee that you will get a loan at the interest rate stated, so be mindful. Instead, see them as a litmus test of sorts; if you are rejected during a soft credit check, it is unwise to proceed with a full application.
