It’s not always possible to have the money you need to hand. The price of a car, home improvement project or holiday often outstrips the amount of cash we have available in our bank accounts. Indeed, it’s said that four in ten people don’t have as much as £500 squirreled away in savings.
For many of us, then, purchasing such big ticket items requires us to obtain finance and one of the most obvious ways to do so is through a personal loan. Before you take out a loan, however, it’s vital to have a good grasp of the pros and cons of doing so.
Pros of a personal loan
You can get as much as you need: Personal loans can allow you access to cash amounts in the tens of thousands, far above the sort of limit that you might receive on a credit card. This should allow you to borrow the full cost of a big money purchase.
It’s easy to know what you’re paying back: When you take out a loan, it’s likely that you’ll set out what you’re going to pay back every month for the duration of the contract. That means you can set aside that amount in your budget and have a direct debit in place to ensure you don’t miss any payments. The interest rate is usually one fixed figure too, making it easier to calculate this.
You can shop around: You can look for big loans paid back over a number or years or smaller amounts in a shorter time. This means that you can shop around for the product that best fits your circumstances.
It’s a competitive market: There’s something of a ‘price war’ under way at the moment – with many lenders offering personal loans with an interest rate below 3%.
Cons of a personal loan
The interest rate could be high: Despite the competitive market at the moment, you may well find a loan still costs more than other forms of borrowing especially, for smaller amounts such as £1,000.
It can be tempting to borrow more than you need: With a personal loan you’ll often find that the very best deals – such as the sub-3% ones mentioned above – only come when you borrow more money. It’s easy to be tempted to take a higher loan than you need to get a better interest rate.
You might not get the advertised rate: Be careful of the term ‘representative APR’. When this is advertised, it’s the rate that the majority (at least 51%) of people will pay. You might actually find yourself accepted for the loan, but at a higher rate.
Personal loans are, therefore, a good way to help you make a planned-out big ticket purchase that you will steadily pay back over a few years. If you’re after a smaller amount of finance, or can pay back over a shorter period, other products such as credit cards might be more suited to your needs.