The study of debt in the UK is a fascinating one, and something that has become increasingly in-depth since the advent of the Great Recession.
We’ve seen the value of household debt increase by around 7% during the last five years, for example, while last September the Bank of England (BoE) revealed that unsecured consumer credit increased by 4.9% in 2017 when adjusted for inflation.
The worry here is that households are borrowing more in order to cope with a challenging macroeconomic climate, with the rate of inflation remaining disproportionately high in relation to national earnings.
This is why taking out a personal loan represents such a big decision at present, and one that will have a significant impact on your short and long-term finances. Below, we’ll look at the key consideration and the factors that you should research before applying for a loan.
1. Your Credit is Key to Securing Personal Loans
Personal loans tend to be unsecured, which means that lenders will not require any form of collateral or security. Instead, they’ll rely heavily on your credit score to make a decision, while also adjusting the interest rate in order to mitigate risk depending on your history and existing debt levels (we’ll have more on this later).
So, when applying for a loan, one of the first things that you’ll need to do is research your credit score. This means requesting a detailed report from a reputable provider such as Experian or Equifax, whether you apply for a free copy or pay a subscription fee to access a more detailed overview of your finances.
This will help you to determine the true value of your outstanding debt, while also highlighting the challenges that you face in terms of your score. It will also offer actionable steps that enable you to improve your score, which could lead to you achieving superior credit terms in the process.
Ultimately, this is an important process, and one which will help you to determine the right type of loan for you. In theory, this should reduce the number of loan applications that you need to make, whether you choose to apply for a standard product or pursue a bad credit loan when your credit score is less than perfect.
2. The Impact of Interest Rates and Additional Fees
We’ve already touched on interest rates, which in the case of personal loans are typically fixed and relatively high.
The rates associated with this type of product are certainly higher than secured loans, while they’re likely to increase further in instances where you have a less than perfect credit score.
It’s important to research the interest rate that will be applied to any potential loan, in order to calculate the true cost of borrowing and the amount that you’ll need to repay. This will also help you to compare the market to identify the best, real-time deals, which may save you money in the longer-term.
You should be wary of additional fees and expenses that may be charged by lenders, such as insurance or late payment charges. This will be detailed in the terms of your proposed agreement, so you’ll need to read through these in detail before signing on the dotted line.
3. Choose the Right Type of Personal Loan
While personal loans may usually be unsecured, there remains a diverse range of associated products available in the current climate.
You can take out personal credit in the form of a debt consolidation loan, for example, through which you’ll borrow a sum that enables you to repay your existing debts. You’ll then commit to a single monthly repayment to your new lender, which should simplify the management of your debt and in some instances reduce the total amount of interest repayable.
The type of personal loan that you apply for will depend on you and your unique circumstances, but the key consideration is that you understand the full range of products available on the market.
This should deliver the best possible results, and enable you to manage your debt and credit score in the most effective and proactive way imaginable.
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