Do's and Don'ts of Personal Loans

By: J Tillotson

If you need a lump sum of cash and don't have time to save up, you may need to take out a loan. Here's a rough guide of what to consider and look for when thinking about a loan.


Work out exactly how much you need.
Borrowing more than you need leads to unnecessary debt. If you need a loan for home improvements for example, add up the cost of all the materials and any labour, and keep to that amount.

Work out exactly how much you can afford per month
Never take out a loan that you will struggle to pay off. Total up all your incomings and outgoings, including consumables like food and fuel, see what's left over, and work on a percentage of that. Never go right up to your limit in case emergencies crop up.

Have a clear use for the money in mind
Getting a loan 'because you can' is the worst reason and you'll find yourself in debt with nothing to show for it. Decide what you need the loan for and stick to that.

Compare, compare, compare!
There are many different personal loans out there, so explore as many as you can, taking note of typical APR and any early settlement charges.

Think ahead
Remember, whatever you borrow will have to be paid back. You will be tied into a contract with a company for quite a long length of time, and making regular payments of a fixed amount. Are you confident that your current financial status is stable?


Get greedy
If you know you can get a personal loan easily, it can be tempting to borrow over and above the amount you actually need. But doing this gives you larger repayments and therefore more chance of getting into arrears.

Take payment protection insurance without thinking
Most personal loans come with optional payment protection. The lender will offer it to you when you apply. In most circumstances this will mean you paying quite a bit extra on your monthly repayment, sometimes as much as 20%. Some companies will not pay out PPI until you have returned to work for at least a month after absence, by which time your account could be in arrears and appearing on your credit file, especially if it's a long absence. If you think you may need PPI, go to an independent company rather than your loan provider.

Forget to read the small print
Always enter into a loan agreement with eyes wide open. Read through the terms and conditions carefully so you know exactly what to expect.

Forget to pay!
Sounds obvious, but it's a common reason for people to get into payment arrears. Even if you have a direct debit set up, in the early stages of loan repayment its easy to forget to leave enough in your bank account for a loan repayment. If you miss payments on personal loans the interest charges will soon mount up, getting you deeper in debt. It's another reason why you should make sure you can easily afford the payments.

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