How to choose the right type of personal loan

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Date: 15 October 2021

A man sorts out his finances

It's likely most of us will take out a personal loan at some point. If you don't have personal savings you can tap into, taking out a personal loan may be just what you need to get your project off the ground or to achieve an ambition.

There are many personal loan options out there. You will have to assess your needs to shortlist the best personal loans for you. If you don't know much about personal loans, here's what you need to know.

What is a personal loan?

Applying for a loan is a common solution for unexpected expenses, financial emergencies, or other specific expenses that exceed your ability to pay as and when they arise. Personal loans are also usually relatively easy to obtain.

A personal loan is a credit that a bank or other financial institution grants to a natural person (as opposed to a credit granted to a company), which allows them to obtain cash to satisfy an economic need - be that paying an unexpected bill, financing their children's studies or to pay for a holiday.

What differentiates them from other loans?

They are called personal loans because, in this type of loan, the borrower is responsible for fulfilling their obligations (repaying the loaned amount and paying the interest and bank commissions) from their present and future personal assets. The lender does not have a guarantee that they will recover the amount loaned as personal loans are unsecured. For this reason, the loan amount is not usually for a sizeable sum. The lender will also assess your ability to repay the amount before approving the loan.

As the borrower is not required to offer an asset as a guarantee (for example, a home as in the case of a mortgage), personal loans are usually processed quicker than some other types of loan.

Types of personal loans

  • Vehicle loan
  • Study loan to cover the costs associated with university education, a master's degree, or a course abroad
  • Home improvement loan
  • Consumer loan offered by commercial establishments to fund sizeable purchases
  • Payroll advance loan (an amount advanced by the bank against a future pay cheque)
  • Travel loan

These are the most common types of personal loan. There are others, but their availability will depend on the lender.

How to choose a personal loan (what to keep in mind)

Personal loans are usually for the purposes of buying a vehicle, for home renovations, the purchase of a computer, to pay for a wedding or in order to study. Broadly, the loan is intended to pay for goods and services of moderate cost.

You need to start by establishing how much you want to borrow. If you're not entirely sure how much you will need it can be helpful to build in a contingency as any lender is likely to lose confidence if you return a little later for more money.

Create a budget with all your regular incomings and outgoings to establish what you can afford to repay each month. Ask yourself how long you want your repayment period to last. Remember, the longer you take to pay it back the greater the sum you repay is likely to be. You need to consider all the costs, the amount you are repaying plus interest and any fees.

Shop around! Look at all the features on offer. Some lenders offer a repayment holiday, the option to pay the loan back sooner or other advantages. Check lender reviews and avoid those without a good reputation. Make sure you can afford the repayments and prioritise loans with lower interest rates. In the end, several banks may be prepared to offer you a personal loan, so do your homework.

Tips to improve your chances of getting a personal loan

  • Prove that you can meet the repayments.
  • Comply with the loan terms or bank conditions.
  • Set a budget for the product or service in question and share it with the bank.
  • Only borrow what you need.
  • Never lie to the bank about your finances.
  • Have a plan for how you will repay the loan and stick with it.

A personal loan may be all it takes to enable you to finally achieve that goal you've been working towards. You should see the loan as an investment - even if your project does not have a purely financial purpose. Money used for studies, a holiday or acquiring property or goods is money you are investing in yourself.

Copyright 2021. Featured post made possible by Camino Financial.

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