If you’re looking to borrow money at an affordable rate and pay back a fixed amount of it each month, then you may want to look towards personal loans.
Whether you’ll be able to find lenders offering affordable loans depends on a number of factors such as your financial situation as well as your credit score.
Today, we’ll look at what options you have and some tips for helping you find and secure affordable loans.
What is a Personal Loan?
A personal loan is one in which no asset is secured against the loan. This means that you don’t put up any valuable asset of yours such as your car or your house as “collateral” in case you start failing to make payments.
Not only will you be able to borrow a larger amount of money with a personal loan than a credit card but you will most likely find lower rates of interest when it comes to personal loans as well.
Furthermore, your repayments will also usually be fixed. This can make it quite easier for you to calculate whether or not you’ll be able to afford the payments. It also makes it easier for you to set up a budget for the repayments.
Always be sure when you’re applying, that you inquire whether the interest rates are fixed or variable.
You will be able to choose the duration over which you’d like to repay the loan.
It may seem tempting to spread out the payments over a long period of time but this is actually counterproductive because of the interest.
Remember, the longer your debt repayment duration is, the more you’ll be paying in interest.
Hence, it’s a good idea to have as short of a repayment duration as you can afford.
If you have several outstanding debts, then a personal short-term (or even long-term) loan can work great for consolidating them.
In this way, you would be answerable only to one creditor and it would also reduce monthly repayment costs.
You can also pay more than the minimum amount required each month if you want. This will help you get out of your debt quicker and essentially, you’ll be paying less in interest.
The disadvantage when it comes to personal short-term loans is that they charge higher rates of interest for smaller amounts of money. Thus, you may be tempted to borrow more money than you need.
Furthermore, most banks won’t lend you less than £1,000. This could also prompt you to borrow more money than you really need.
One thing I always urge debtors to ensure is that the lender they’re approaching is authorised and regulated by the Financial Conduct Authority. The FCA has several guidelines in place which protect you from being mistreated in any way.
There are many loan sharks operating illegally in the UK who aren’t authorised and regulated by the Financial Conduct Authority. If you take out a loan from them, they might charge you ridiculously high interest rates and may even threaten you with violence and abuse if you don’t make your payments.
If you’re having trouble finding a viable lender, you can choose to contact an independent charity such as Payplan. They may able to help you find one.
What Are Some Ways of Reducing the Cost of Loan Repayments?
There are a number of ways through which you can look for an affordable loan or reduce the cost of your existing loan.
Some of these ways are:
Improve your Credit Rating
If you have a poor credit rating, you’ll only have access to loans with high interest rates. Taking out time to improve your credit rating can dramatically affect what types of loans you have access to.
You will find that you have access to much more affordable loans with a good credit rating than you would with a poor one.
For advice on how to improve your credit rating to find an affordable loan, you can click here.
Switch to a Loan with a Cheaper Interest Rate or a Shorter Term
If you’re currently making loan repayments to a lender that is charging you high interest or if they have very long term requirements, then it may be a prudent solution to take out another loan to pay the first one off in full.
The advantage of switching to a second loan with either a smaller interest rate or a shorter term (or both) would be that you’re effectively paying less money in the form of interest.
Just be sure to look up any early repayment fees that your former lender may have. You must also take into account any setup charges and fees that your new loan may have.
Please take into account the fact that the amount of money you can be charged on early repayment has a ceiling determined by law.
That being said, there might be additional charges if you pay more than £8,000 in one year.
Utilising Credit Cards to Pay Off Loans
The idea here is pretty much the same as in the approach described above.
If you practice financial discipline and have a good credit history, then you may be eligible to apply and obtain an interest-free or a low-interest balance transfer credit card.
You can then use this low-interest or 0% interest card to transfer money directly into your bank account. Next, you can use this money in your bank account to pay off any high-interest loans or overdrafts which you may have taken on.
However, you must keep in mind that these deals (sometimes called ‘super balance transfers’) have a fee. Hence, you will need to calculate whether it’s worth it for you to do this or not.
Making Extra Payments towards Your Loans
This may seem counterintuitive but you have to look at the fact that by making extra payments, you’re effectively shortening your term duration. Thus, reducing the amount you’ll have to pay back as interest.
You can use this technique to turn an expensive loan into a fairly affordable one.
When it comes to unsecured loans taken out after 1st February 2011, you are allowed to make extra payments of up to £8,000 in one year without evoking any type of penalty.
If you make extra payments of more than £8,000 in one year, then the maximum penalty that a lender can enforce is 1% of the entire amount you have repaid so far.
For example, if you paid £10,000 in the first year, then the maximum penalty you could be charged with would be £100.
One other important thing to note is that if your affordable loan is in the final year according to the agreement, then the maximum penalty that the lender can enforce is 0.5% of the amount you’ve repaid so far.
It’s important that you inform your lender of the overpayment first.
You have to give them notice of the overpayment and you must make this overpayment within 28 days of your notice.
There are a number of steps you can take in order to improve your access to lenders that could provide you with a more affordable loan.
There are also a number of actions you can take to reduce the cost of your current loan.
Just be sure to take your time to plan your approach and be aware of all hidden costs and fees.