How do I choose the right personal loan?
If you’ve decided that a personal loan is the right option for you, the next step is to figure out which personal loan is the best match for your particular circumstances.
It’s important to give this decision the consideration it deserves: if you apply for the wrong type of personal loan, you may struggle to pay it off, which could have a negative long-term impact on your credit score. So, to help you make the right choice, here are four things that you might want to think about when comparing your options.
Consider whether a secured or unsecured loan is better for you
A secured loan is ‘backed up’ by a piece of collateral, such as a vehicle. On the one hand, this sometimes means that you can access lower interest rates and a higher borrowing limit. This can make a secured loan attractive if you’re looking to access funds at the lowest possible rate. On the other hand, the lender may be entitled to take possession of your collateral if you default on the loan. For this reason, it’s generally easier to qualify for a secured loan, which can make it an appealing option if you don’t have an excellent credit history.
As the name suggests, an unsecured loan doesn’t require you to provide an asset as a guarantee. This can result in a higher interest rate, but can also give you more flexibility in terms of how you use your loan.
Check whether the interest rate is fixed or variable
If your personal loan has a fixed interest rate, your interest rate will remain the same over the full loan term, allowing you to lock in a competitive interest rate.
A variable personal loan offers an interest rate that is subject to change over time due to market fluctuations. As a result, you stand to benefit from lower interest payments overall if the rate declines over time. However, you could also end up paying more. You’re generally more likely to be able to make early repayments if your loan has a variable rate – this gives you the flexibility to avoid future interest by paying off the loan as quickly as possible. The good news is that with RateSetter your repayments won’t change even if you have a variable personal loan, giving you confidence that you’ll be able to meet your repayments.
Make sure you can manage the repayment schedule
Generally speaking, loan repayments are made weekly, fortnightly, or monthly. The best option for you may be determined by factors such as how often you get paid and whether you’d prefer to pay a little bit every week or focus your efforts on paying down monthly lump sums.
While considering the repayment schedule, you should check whether or not the loan provider allows early or extra repayments to give you the option of making additional repayments to clear the debt as quickly as possible and minimise your interest obligations.
Don’t apply for a loan you can’t use
If you intend to go on a holiday or pay for your wedding, then it would be a bad idea to apply for a loan designed to finance the purchase of a car or a restricted to specific use like home renovation (these loans are sometimes priced more attractively but don’t let you choose how you use the funds). Similarly, if you’re looking for money to invest in a business, then a personal loan mightn’t be the best option for you. Many loans entail restrictions on how the money you receive can be spent, so make sure to check that the loan you apply for will allow you to achieve your goals.
Work out how long it will take you to pay off the loan
Generally, the sooner you can pay off a loan the better: you’ll end up paying less in interest, which will make the loan more affordable overall. However, a short-term loan also means higher repayment amounts, be they weekly, fortnightly, or monthly. You should aim to find a comfortable middle-ground between making affordable repayment amounts and securing the shortest possible loan term.
This information does not constitute financial advice and you should consider whether it is appropriate to your circumstances before you act in reliance on it. Any opinions, forecasts or recommendations reflect the judgement and assumptions of RateSetter as at the date of publication and may later change without notice.