10 things you should know before applying for a loan
Written by: Rebecca Robinson
With many of us struggling to make ends meet, the number of people applying for loans is at a record high. If you’re considering taking out a loan for whatever reason, make sure you read these top 10 things you should know before applying for a loan:
1) There are two types of loans
Secured and unsecured. You can only borrow up to £25,000 with an unsecured loan as examples show in the table below and they are normally aimed at those wanting to borrow smaller amounts.
| Lender | Loan Amount over 60 months | Representative APR% | Cost | |
|---|---|---|---|---|
 | £5,000 | 15.9% APR | £121.32 per month | Apply |
 | £5,000 | 48.5% APR | £222.76 per month | Apply |
 | £5,000 | 6.9% APR | £98.28 per month | Apply |
 | £300 over 65 days | 574.86% APR | £136.51 per month | Apply |
2) Your home can be repossessed
Secured loans are usually between £10,000 and £100,000 depending on the equity available within your home. If you don’t keep up repayments on a secured loan, your home could be repossessed.
3) You might not get the interest rate you see
Rates advertised are usually the lowest rate a lender can offer based on an excellent credit rating. Therefore if you’re credit rating is less than perfect, you may be offered a higher rate and in turn, repay more each month for the loan.
4) For short term loans, a credit card may be better
With so many 0% or low interest interest credit cards on the market right now, if you need to borrow a smaller amount over a short period of time, you could be much better off using a credit card instead. In some cases, borrowing could cost you nothing!
5) The better your credit score, the lower the interest rate.
Low interest rates are reserved for those with the best credit score, so if you’ve got a poor rating, expect to pay very high interest or even struggle to find one that is suitable. In that case, look for a loan specifically for bad credit.
6) You may be charged for paying back the loan early
If you think you may be in a position to pay a loan off early, check the small print as many loans have hidden charges for repaying early. Lenders charge for early repayment because they miss out on interest that would have been paid on the loan. Always check for these before taking out or paying off a loan.
7) You will pay considerably more interest on longer term loans
Although monthly repayments will be less, you will pay much more in long run if you choose to take your loan out over a longer period. For example; if you borrowed £5,000 over five years at 7.9%, you would pay back £6,068.57 in total. If you cut the loan term down to three years, your monthly repayments would be slightly higher but the total repayed would be £5,632.25, that’s over £400 less.
8) Check for hidden costs
As well as early repayment charges, check for administrative or arrangement fees and whether you could be charged for late payments. They’re often in the small print so read it through carefully!
9) PPI is NOT a requirement
Payment Protection Insurance has been in the press a lot, with many lenders miss-selling and subsequntly having to repay it. Always check whether it has been added and if you do think you may need PPI, you’re free to shop around elsewhere for it, you don’t have to take out the lenders insurance.
10) Repayments may vary
We’re all aware of how mortgage payments can be variable depending on how it’s set up, but be aware that many secured loans are also subject to fluctuations in interest rates. Your monthly repayments may increase (or decrease) so bear in mind when budgeting for a loan.
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