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How to pick the right loan

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Written by: YourMoney.com
20/02/2016
There's no need to stress about selecting a loan. Just be sure to consider these important factors.

Loan term

Loans are best for people looking to borrow money for the medium to long term, making payments over several years. If you just need the money for a few months to a year, an interest-free credit card may be the best option.

Secured vs unsecured

Secured and unsecured loans are very different, so be sure you’re taking out the right form of loan for you.

If you take out a secured loan a piece of your property – usually your home – is held as collateral, meaning that if you default it can be repossessed by your lender. This element can make secured loans risky, but also makes these loans easier to obtain and available for larger amounts. The repayment term on secured loans can also be longer, meaning lower monthly payments but a higher cost across the life of the loan.

An unsecured loan is not linked to any kind of collateral. Anyone with good credit should be able to take out a personal loan, but you will only be able to borrow up to £25,000 and interest rates may be higher than would be charged on a secured loan.

Interest rates

Small differences in a loan’s interest rate can add up. With this in mind, always try to get the lowest interest rate you possibly can. Check the headline rates on offer, but be aware that only applicants with the best credit scores will be able to borrow at those rates. The majority of applicants will pay slightly more.

If your credit is less than perfect, don’t try applying for the best interest rates. Your application will likely be rejected and your credit score knocked further.

Also take notice of whether your interest rate is fixed or variable. A fixed rate means that the interest rate will stay the same for the entire life of the loan. A variable rate allows your lender to hike up the interest rate whenever it sees fit, a change that could significantly increase your monthly repayments and the total cost of the loan. Approach these loans with caution.

Redemption charges and fees

If you plan to repay your loan early, be careful of redemption charges. These are the fees that lenders charge for early repayment. For unsecured loans and secured loans under £25,000 these fees are limited to two months’ interest, but for larger secured loans they can be significant.

Also be aware of whether your lender charges a fee set up or administer the loan, along with whether they charge fees on late payments.

Affordability

It’s vital that you only borrow an amount that you can afford to repay. Be sure that your monthly repayments are easily affordable. Check the terms and conditions of your loan to see whether you can defer repayments if you find yourself struggling.

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