A personal or unsecured loan doesn’t require offering collateral in exchange for borrowing money and mostly comes with single-digit interest rates. Banks and lenders offer it as an option to people with a good or medium credit rating.
Such borrowers can take £1000 and £25,000 as personal loans for managing emergency expenses, debt consolidation, large purchases, etc. Meanwhile, bad creditors might have a limit of £5,000. According to a source, the maximum duration for repaying such a loan extends up to five years.
Lenders and banks offer fixed or variable Annual Percentage Rate (APR) with personal loans. Comparison websites can help to find cost-friendly loan options with the lowest APR and save money.
Borrowers also chose personal loans as an alternative to credit cards because it mostly comes with a fixed single-digit interest rate. Moreover, it offers many other advantages, such as improved credit score, money for emergencies, fast cash access, etc.
10 Reasons to Take a Personal Loan
The most significant reason for taking personal loans is debt consolidation. The latter offers the benefit of combining existing loans and credit card debts into a single repayment. By doing so, borrowers can make scheduled monthly payments, cover all debts, and avoid late payment charges.
Besides this, taking a personal loan for debt consolidation lowers the interest rate on credit cards with no zero APR promotional period. According to a source, the average credit card interest rate is 16.04%, and APR on a personal loan is 11.84 since February 2021.
Moreover, consumers with an excellent score might even receive offers for 6 to 8 per cent interest rates. Such borrowers can also avail a higher loan compared to credit card limits. So, it helps to lower household expenses, increase savings, and recover from the ongoing debt cycle.
Improves the Credit Score
Personal loans of £50 to £5,000 are also available for people with bad credit. Unfortunately, it comes with high-interest rates between 26.8 and 49.9 per cent. Lenders may even offer personal loans at variable interest rates.
A credit-builder loan is an alternative option for people that want a loan but have a poor rating. The lender holds the loan as a nest egg until the borrower completes the interest and principal repayments. After a tenure of six months to two years, the borrower receives the money.
The money comes with the accumulated interest rates in the savings account, wherein the lender keeps it until the final repayment. Under both circumstances, the lender informs the government agencies about the continuous and timely monthly repayments through a financial summary. Therefore, it improves the credit rating of the borrower.
Fulfils Requirement for Lump Sum Money
You can require a lump sum amount for covering various expenses. These include making a down payment on a house, going on a vacation, buying equipment for a house or business, wedding, etc.
Besides this, you can even require money immediately for paying off debts, recovering utility expenses, or home repair. Under such circumstances, personal loans come in handy as they come with manageable monthly repayments, especially if you have an excellent credit score.
Unlike many other loan options, such as a car or home loans, a personal loan is versatile. However, lenders may have restrictions against using the amount for starting a firm or post-secondary education. Some might even prohibit buying real estate with the money.
Recovers Emergency Expenses
During these uncertain times, emergencies have significantly increased. You might require money for funerals, recover household expenses due to recent unemployment, or pay medical bills.
According to a source, common medical treatments such as fertility treatment, cosmetic surgery, or dental work can cost more than £3,553.27. Likewise, median funerals cost can go upto £5,429.40.
Besides this, you can also face ancillary expenses such as medical travel, aftercare, parking, medication, etc. Personal loans disburse quickly into an account and help to manage such unprecedented charges.
Doesn’t Require Collateral
Unlike secured loans that require an asset such as a vehicle or home as collateral, personal loans don’t. It means, in case you can’t make repayments, the lender can’t force you to sell the asset to recover the amount. As mentioned before, it is one of the most significant reasons for opting for it.
Unfortunately, if the repayment gets delayed for more than thirty days, the lender reports it to the credit bureau, and the borrower’s score diminishes. After a grace period of fifteen days, the lender may add a late payment fee to the next repayment.
If the lender comes across recurring missing repayments or defaults, a County Court Judgement (CCJ) may get filed. The default on the credit report also stays for seven years. It makes it challenging to avail of new loans.
Might Not Incorporate ERC
Lenders and banks offer many personal loans without an Early Repayment Charge (ERC). It means, if the borrower wants to settle the debt before the duration, he/she won’t incur a fee. However, often borrowers charge upto two months for early repayments.
But, Consumer Court Directive states that you make a loan full or partial loan settlements with no penalty fees of up to £8,000. The circumstances differ if the borrower settles such an amount a year before the loan expiration date.
Under such an instance, the lender may charge one per cent on the amount being paid early. The percentage can exceed 0.5% if the borrower decides to make an early repayment during the final year. The best method to know savings on debt due to early settlement is by asking the lender for a statement.
Payday Loan Alternative
According to a source, the APR on payday loans can go up to 391 per cent. Meanwhile, the interest rate of personal loans hardly goes above 51 per cent, even for bad creditors. Therefore, the latter can save hundreds of pounds in interest rate charges.
Moreover, payday loans come with a major drawback of short tenure lasting between two to four weeks. Therefore, borrowers need to renew the loan, and the accrued APR of the existing debt adds to the new loan interest.
Personal loans come with a tenure of up to five years. As mentioned earlier, lenders even provide high sums at six to eight per cent interest for borrowers with excellent credit scores. So, borrowers have a lower chance of landing in a debt cycle compared to payday loans.
Offers Versatility and Flexibility
A car loan can only offer usefulness while buying a vehicle. Similarly, home loans and mortgages provide an opportunity to take a loan against real estate. On the other hand, a personal loan is useful for serving different purposes ranging between debt consolidation and medical bill payments.
According to a source, some firms offer personal loans up to £50,000. Therefore, you can use the amount for financing large expenses. However, the lender has the option to specify the usage of the loan.
Therefore, you must read the terms and conditions before applying for an online personal loan. As a result, we can state that, unlike many other competitors, a personal loan offers versatility and flexibility.
Money Borrowing Option for Bad Creditors
Bad creditors can avail of personal loans by reaching the score and other financial requirements of the lenders. Borrowers can make sure to take a few steps to become eligible for the loan. These include checking and improving the score, evaluating budget, multiple lender pre-qualification, involving a co-signer, submitting an application, and regular repayments.
The best methods to improve the credit score are removing CCJs, repaying lenders, and covering more than minimum repayments. Adding a credible co-signer puts the responsibility of recovering the debt on a second person if you fail to do so.
If it becomes challenging to become eligible for a personal loan, you can apply for a bad credit loan. You can even diminish credit usage or use a zero per cent debt-transfer credit card to manage the debt.
Availability of Repayment Options
The cost of a personal loan depends on the loan amount, tenure, credit history and income. Lenders offer a lower interest rate for longer tenures and higher interest for short-terms. Moreover, bad creditors pay much higher interest rates than medium or excellent borrowers.
You can estimate the average interest on the personal loan by using an online loan repayment calculator. Comparison websites would also help to know the exact amount with different personal loans.
fBy doing so, you can keep your finances intact and find a suitable fixed APR unsecured loan. As mentioned earlier, it is crucial to check the affordability of a loan. It can lead to rejections if the lender doesn’t find you eligible with a hard check. Also, don’t submit multiple applications before improving the credit score.