These summer months may be a time for holidays accessorised with jugs of Pimms, but a day or two of sunshine can also be enough to turn our thoughts to a life-changing venture. Maybe you've decided you're not going another summer without that conservatory or garden summer house. Maybe you've decided it's time to up sticks and move home altogether. Perhaps you've even decided to get the cosmetic surgery you've always wanted...
Whatever your motivation, such purchases/investments often require the support of a loan so that you can spread the cost over time. And there's nothing wrong with debt in itself - companies borrow, our government borrows - you just need to ensure you can afford to finance your debt. There's nothing worse than signing up for a loan that will typically have a one to five-year repayment period, only to discover you can barely afford the first repayment.
"Taking out a loan could be sensible for all sorts of reasons - from consolidating existing debts, to buying a car or making home improvements," said Nick Tsimbidaros, Marketing Director at BeatThatQuote.com. "But loans can also be expensive - you need to seek out the best rate and carefully assess your own budget to ensure you can afford the long-term cost."
Interest and repayment periods
Most loans will be advertised alongside an annual percentage rate (APR). This is the interest that you will be charged over the lifetime of the loan. When you are looking for a loan, you should compare the available APRs and don't forget to look at a variety of providers - supermarkets and online companies often offer more favourable APRs, which can sometimes be cheaper than the traditional banks/building societies.
If you are worried about the cost of a loan, just by comparing APR rates, you might also be able to get your potential loan provider to tell you what the total cost of your loan would be over the whole repayment period. This will help you directly compare the amount with your budget and other loan providers. In addition, as interest rates on loans are generally fixed for the whole repayment period, you should be able to see what your monthly repayments would be for the whole length of the loan. If you realise that the monthly repayments will seriously stretch your budget, be very careful. If your circumstances change, you do not want to be faced with repayments you can no longer afford - this is how debts quickly spiral out of control.
Also don't forget that spreading the cost of your loan may seem ideal - paying back £5,000 over five years, for example, may ensure you have low monthly payments that are far more manageable. But, the longer you spend paying a loan back, the more interest you will be charged. Decide how much you need, do not borrow more than you need, and pay it back as quickly as you can. Remember, however, that the quicker you pay back a loan, the higher your monthly payments will be. Just ensure you can afford the higher payments before you try to save money this way.
If you only need a loan for a very short period of time - for example, six months to a year - you may be better off looking at credit-card deals. Many credit card providers now offer highly favourable introductory rates or 0% interest-free periods that could prove cheaper than a loan, if you plan to pay the balance off quickly.
When you apply for a loan, you will probably be offered 'loan protection insurance'. This will cover your repayments should your circumstances change - for example, if you are made redundant or fall ill. Such cover can be expensive, however, and there will be exclusions that may make it difficult for you to claim. New rules, however, mean that any insurance costs must now be included in the APR, making it easier for you to compare loans that include insurance to those that don't.
Unsecured or secured?
A secured loan quite simply means that the debt is placed against your home - if you fail to make repayments, your home might be at risk. If you are highly confident of your repayment ability, then you may be able to get a cheaper interest rate by applying for a secured loan. But if you have any concerns whatsoever, you might be better off going for an unsecured loan. Yes, it might have a higher interest rate, but your home will be safe if you struggle to make repayments.
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