If you want to make improvements to your home or buy a new car, a personal loan can give you a helping hand. But before you apply for a loan, there are some things you need to consider.
1. Is a personal loan the right option?
A personal loan isn’t the only choice available. Are you able to delay the spending and take time to save the money? Even if you’re not able to save the whole amount, saving a portion of it will put you in a better position.
If the amount you need is relatively small and you’re confident you can pay it back quickly, a credit card with an interest-free period on purchases is another option that could suit.
2. What will the repayments be?
Use our calculator to look at how much your repayments could be and how that may impact your budget.
If you’re looking at a personal loan with a variable interest rate keep in mind that the rate of interest could go up or down. If it was to go up, could you still afford the repayments? If not, you may want to consider reducing the loan amount or extending the loan term.
3. Is the loan secured or unsecured?
A secured loan is one where you provide an asset (such as a car or property) as security for a reduced interest rate. Keep in mind that the asset is at risk if you can’t pay the loan back. With an unsecured loan, you don’t provide security, but the amount you can borrow is typically smaller. HSBC offers both secured loans – in the form of mortgages - and unsecured loans.
4. What's the term of the loan?
This affects the amount of interest you’ll pay, and ultimately the overall cost of the loan. The longer the loan term is the less your regular repayments will be, but you will likely end up paying more interest over the course of the loan. Again you can use our calculator to look at how changing the loan term may change the overall amount of interest you pay.
5. What exactly are the fees and charges?
Loans are advertised with a ‘representative APR’ which is an annual percentage rate. Your financial history and personal circumstances, as well as how much you are borrowing, will determine the final interest rate you’re offered, but you can use the representative rate as a way of comparing available offers from different banks.
You should also be on the lookout for any additional charges associated with taking out the loan, for example some lenders may charge an arrangement fee. These, together with the interest rate, can make a big difference to the overall cost of the loan.
6. Is there a penalty for early repayment?
Some lenders will charge you a fee for paying off your personal loan early. If you feel this is something you may want to do, then avoiding this fee could be a key requirement.
7. How's your credit report looking?
Your past borrowing and financial history can determine whether you are approved for a personal loan, as well as the amount of money and interest rate you’re offered. Credit reports detailing your financial history are held by the three credit reference agencies – TransUnion, Equifax and Experian. You can see the credit scores and credit ratings that these agencies have for you for free or for a small fee.
It can be a good idea to check, if only to make sure there are no mistakes on your file. Keep in mind that your credit report isn’t the only thing that a bank will look at when making a decision so it won’t tell you whether or not you will be approved.
8. Are you ready to apply for a loan?
Getting a quote for a loan won’t usually appear on your credit report, but making an application often will. Too many applications can have a negative impact on your credit report, so it’s wise to be sure that a particular loan is right for you before you apply.