
What to Consider Before Borrowing a Personal Loan
Taking out a personal loan can be helpful when you need money for something important, like fixing your car, paying for a holiday, or covering unexpected bills. In fact, around 19% of households have borrowed a personal loan. However, borrowing money is a big decision, and it’s important to think carefully before you take out a personal loan. So, here are some things you should be considering to make the best choice for you.
Why Think Before Borrowing?
A personal loan means you are borrowing money from a lender and then paying it back in regular amounts over time. However, remember that this money isn’t free. You will have to pay back more than you borrowed because of interest rates and fees. If you borrow without planning, it could lead to problems, like further debt or financial stress.
How Much Money Do You Need?
First, decide exactly how much money you need to borrow. It can be tempting to ask for more “just in case,” but borrowing more means paying back more in the future. Think about your reason for the loan carefully. If you only need £1,000 for a car repair, don’t borrow more than you need. Being clear about the amount helps you avoid unnecessary costs and debt.
Can You Afford the Monthly Payments?
Before you borrow, check if you can comfortably afford the monthly payments. Look at your income and your regular expenses. The loan payments should fit into your budget without making life difficult. If the payments are too high, you might miss them or have to borrow more, which makes things worse, as this can have further complications and cause more issues.
Interest Rates and Fees Matter
When you borrow money, you don’t just pay back what you borrowed; you also pay interest. Different lenders offer different interest rates. In the UK, the average personal loan interest rate is about 6.5% per year, but this can change depending on your credit score and the lender. Your interest rate can decrease if you have a higher credit score, or increase with a score on the lower end of the scale. We always advise people to try and improve their credit score wherever possible.
How Long Will You Borrow For?
Your loan duration will depend on own terms agreed with the lender. Typically, you will decide this depending on your own budget and how much you can afford to pay per month. This means that different loans come with different durations. Some loans last for a year, others for five years. A longer loan term usually means smaller monthly payments, but you will pay more interest in total. A shorter loan term means higher monthly payments but less interest overall.
Is This the Best Option?
Finally, consider if a personal loan is the best way to get money. Sometimes, there are other options like borrowing from family or using savings. Like anything, each option has its pros and cons, so it’s important to take time to compare and choose what suits you best.