Need a Loan? – Test Your Knowledge First
When you are looking to get a loan there are a few things that you should know or should consider before you sign. You want to make sure that you are going to get the best possible deal you can when looking for a loan and you want to know you are going to be on a plan that is going to work better for you in the long run. For example, many people consider placing all their debts into a single lump sum using a consolidation loan, which may actually prove to put you in a position that is worse than the one you are currently in. One of the biggest problems that people run into when looking into loans is the fact that lenders may not be willing to lend you everything you need - there are a couple of things you can do in this type of situation. One of the biggest problems that people run into when looking into loans is the fact that lenders may not be willing to lend you everything you need. You also need to consider what kind of economic factors such as credit crunches will do to the interest rates. Another thing to watch out for is the get your money quickly situations.
So, as you can see, there are a number of things to be taken into consideration before you go looking for a loan. Below, you'll find some of the most common questions and answers to boost your knowledge in this area.
Q. Should I get a consolidation loan to put all my debts into one big pot?
A. This is the most common question I’m asked about loans, and let me be honest, it does fill me with despair. Consolidating is never an aim in its own right. In fact, it’s often a disaster waiting to happen. If you have a lot of small loans or credit cards with debts on, the primary aim should be to pay them off as quickly as you can at the lowest possible rate.
The reason I’m so frequently asked this is that consolidation loan providers have spent countless millions trying to push the public’s confusion over these deals to make them seem attractive, often the key claim is they can save you money by reducing your outgoings to a “manageable” level using just “one single monthly payment”.
Yet to do this, consolidation loans stretch your borrowing over a longer period, maybe 15, 20 or even 25 years and that means the amount you pay back is going to be huge. A £10,000 loan on a high street credit card at a horrid 18% costs £5,240 paid off in five years, many think shifting it to a considation loan at half the rate 9% is cheaper, but as its spread over 25 years, the actual cost is £15,200 which is nearly three times more.
Worse still, many consolidation loans are actually secured loans and thus you pay more, for longer, and are risking your home. The key aim is to cut the interest costs of your debt, whether that’s on one loan or twenty two and pay it off as quickly as possible.
Q. They won’t lend me as much as I need. What should I do?
A. Once you’ve applied for the loan it's already on the credit file, so assuming you applied for the cheapest loan for you, then there’s no point in not accepting that cash because it's not the money you need. The answer is relatively simple, just apply for another loan to fill the gap. Providing you haven't been turned down due to a credit score issue, this isn’t likely to be too difficult.
Q. What will happen to my loan if UK interest rates change?
A. Almost every personal loan is a fixed rate; thus the rate and repayments you are given at the outset are fixed over the life of the loan, regardless of what happens to the bank base rate
. Thus there’s no impact whatsoever, whether rates rise or fall.
However the change in the base rates will affect those looking to get a new loan, yet it’s not an exact relationship. As loans are borrowed over the long term, the rates lenders set depend more on the city predictions of long term interest rates than the UK base rate.
Q. What’s the impact of the credit crunch on loan rates?
A. The Credit Crunch means it’s tough for lenders to borrow money, so as they’ve got less money, they’ve less to lend to us. That means it’s getting progressively more difficult to borrow and even if you can borrow you’re going to pay relatively more for it compared to standard interest rates.
Q. How quickly will I get the money?
A. That depends on the lender, there are some which make a big play on giving you the cash instantly straight from a bank branch, though invariably you’ll pay a lot more for these. It’s worth asking yourself, whether the extra day or two’s speed is worth paying a much higher interest rate for the five year life of the loan.
Alternatively some of the cheaper loans do allow you to pay a delivery fee of around £50 to get the money quickly. This can be set as a default option so be careful.
Q. What is a homeowner loan?
A. Simply put a homeowner loan is when a company requires you to own or have a mortgage on your home before it’ll lend. These are usually, but not always, secured loans, where if you can’t repay they can take your house. However some unsecured personal loan companies do require their customers to be homeowners, this is because those who do own homes are less likely to go bankrupt or default as the risk for them is bigger.
Q. Is it worth getting a loan for a car from the dealer?
A. Car dealerships often quote a ‘flat interest rate' rather than the Annual Percentage Rate (APR) that banks use. This makes expensive loans look cheap. Double the flat rate to get a rough APR e.g. a 6% flat rate is 12% APR. Always compare loans based on the total amount you'll repay.
