09 November 2016

How to steer clear of personal loan pitfalls

Personal loans have a wide range of uses, bridging gaps in people’s finances and helping them make one-off purchases. Whether you’re a homeowner looking to renovate a property, a new parent in need of a bigger car, or a bride hoping to plan the perfect wedding day, these loans can certainly come in handy.

 

But despite their ability to offer fixed interest rates and repayment terms, you shouldn’t simply rush out and accept the first loan which is offered to you. Failing to do your homework could lead to hasty decisions – ultimately harming your finances in the long run.

We’ve decided to put the spotlight on common personal loan pitfalls and – more importantly – how you can avoid them.

Top 5 personal loan mistakes to avoid

As with any other type of borrowing, applying for a personal loan is a big commitment. Whether you intend to borrow hundreds or thousands of pounds, watch out for these potential pitfalls…

1. Not checking your credit rating first

Lenders will charge different interest rates on personal loans, depending on the amount you want to borrow and the repayment term. But your credit rating could also have an impact, with higher interest rates or outright rejections more likely if you’ve had financial problems in the past.

A few simple steps can improve your credit rating, such as adding your name to the electoral roll. By checking your credit score in advance and doing all you can to nurture it, you’re more likely to receive favourable borrowing terms from lenders.

2. Failing to shop around

These days, households are encouraged to shop around for everything from energy tariffs through to their weekly grocery baskets. Personal loans should be no different. By rushing into a deal, you could end up repaying a loan for much longer and at a higher Annual Percentage Rate (APR) than is necessary.

Lenders will quote different rates of interest depending on your repayment preferences and personal circumstances, so it’s well worth comparing their offers. Shopping around may be time-consuming but it could save you valuable cash in the long term.

3. Not reading the small print

Whether you need a loan to fund a shiny new conservatory or the car of your dreams, in all the excitement it may be tempting to instantly sign any papers that are placed in front of you.

But failing to check the small print of a loan agreement could land you in hot water. For instance, the representative APR promoted by a lender in its adverts may not be the same as the rate you’re offered – rates can vary depending on your personal circumstances. You could pay much more than you bargained for if you don’t take the time to read through the key terms and conditions. 

However some providers will show you a personalised rate before you apply, meaning that you know exactly what rate you will have and your monthly repayment so you know what product you are signing up for before you are credit scored.

4. Borrowing more than you can afford

Because of their flexibility, it can be tempting to overstretch yourself when taking out a personal loan. With some lenders offering up to £25,000, you might get carried away and suddenly decide to include a swimming pool in your plans for a property renovation.

To avoid a heavy debt burden, it’s important to keep a level head and dismiss such temptations. Since loan repayments tend to be monthly, your regular wage packet might suddenly feel a lot lighter if you’ve borrowed beyond your means. You can check out what you could afford using our budget calculator.

5. Quickly applying for a number of loans

If a lender turns down your loan request, it may be tempting to send off multiple applications to other providers until one of them agrees to help you. But doing so could actually harm your credit rating – making it even more difficult to borrow money in the future.

Rather than panicking, go back to the drawing board and look at why your original application may have been turned down. It could be that your credit report needs a bit of TLC.

A responsible approach to borrowing

As we’ve seen, the flexibility of personal loans means some people can be tempted to bite off more than they can chew. Before signing up to any deals, it’s important to consider whether a personal loan is the right borrowing option for you – and if you can actually afford to make regular repayments. 


Find out more about a Nationwide personal loan

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