The Ultimate Personal Loan Guide Part 2: Chapter 5 - Personal Loans Information - Making The Right Choice

Do you need to get a loan and cannot decide which one? Comparing personal loans should be a thought out process which can take time. Personal Loans Now is here to assist you to compare personal loans correctly and find a loan best suited for you.

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Learning Highlights
  • Interest rates on all personal loans
  • Compare Personal Loans of fixed rate and variable rate
  • The flexibility or security options
  • pros and cons of using a loan

Compare Personal Loans So You Can Make The Right Choice

Borrowing money is a serious business. Even more important is to compare personal loans so that you make the right choice before you get a loan. Compare personal loans that suit your financial circumstance the best.

Comparing Personal Loans: Variable Rate Or Fixed Rate, Which Is Better?

In the past, it was a given that lenders granted mortgages with a variable rate of interest. That is, the rate would go up and down according to the bank rate. During the 1980s when interest rates were as high as 15% this caused many problems. Some homeowners became unable to make the higher repayments and lost their properties.

In the 1990s and beyond, due to the rise in the number of lenders, fixed rate mortgages became more easily available. Many new homeowners chose this kind of loan. It allowed them to budget for the repayments without succumbing to the vagaries of rising and falling Bank of England base rates.

Interest Rates On Personal Loans

In the current economic climate, with extremely low bank base, it would appear that there is little to be gained from taking out a variable rate personal loan.

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There is very little room for interest rates to go much lower. Therefore, choosing a variable rate loan would seem to be a bad choice.

Also, economic forecasters are now making predictions for after Brexit. Inflation will go up, and interest rate rises will follow as a counter measure. It might be that the age of low personal loan interest rates comes to an end during the two year period that it will take the UK to secede from the EU.

Interest rates may need to rise “soon” to keep a lid on inflation if the UK economy continues its “remarkably solid and stable” performance, according to a top Bank of England policymaker. – The Telegraph February 2017

However, in the meantime let’s compare personal loans by looking at the benefits and drawbacks of both fixed rate and variable rate. This might help you to decide which is the best choice.

Personal Loans Compare: What Is A Fixed Rate Personal Loan?

A fixed rate personal loan is exactly what it says it is. You borrow a sum of money (the principal amount) which you repay with interest.

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The rate of interest is agreed between the parties at the start of when you get a loan. This does not change during the whole term of the agreement.

Depending what you use the loan for, e.g. a car loan or a loan secured on the house, the fixed rate might only apply for a set length of time before reverting to a variable rate. This will be in the terms of the agreement. It is important to check exactly how long the fixed rate will run for.

The obvious advantage of a fixed rate loan is that you always know the cost of your repayment each month. It makes it easier to budget monthly outgoings.

What Is A Variable Rate Personal Loan?

Taking out a variable rate personal loan means that the interest rate is subject to change. In the past when rates were higher this could mean that the rate would go down if banks reduce their rates. However, with very low bank rates now being the norm, variable rate loans in the current climate are unlikely to go lower.

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Conversely, if rates do start to rise, which is increasingly possible in the next year or so, then a variable rate loan could end up costing you more than you have budgeted for.

“It’s quite possible that in three years’ time Bank Rate might be 3pc. One has to imagine that it is going back up to something like 5pc, but that might take a long time to get to.” – Roger Bootle, the Telegraph December 2016

Following the referendum vote in June 2016, there is currently lots of uncertainty about the economic climate in the UK. It is entirely possible that sudden rate rises could occur. So, if you want to take out a personal loan and be certain of the rate of charged interest, the best option is a fixed rate personal loan.

Compare Personal Loan Rates: The Benefits And Drawbacks Of Variable And Fixed Rate Loans

Variable Rate Loans

There are obvious benefits to a variable rate loan. The most obvious being in the future the interest rate could go down thereby reducing the cost of borrowing. Variable rate personal loans can also be more flexible with the possibility of full early repayment with no additional charge.

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The downside to a variable rate personal loan is that if interest rates do go up, the total cost of borrowing also goes up. This makes it difficult to budget for future payments.

Fixed Rate Personal Loans.

The stability of budgeting is the main advantage of taking out a fixed rate personal loan. There is no exposure to possible interest rate increases.

There is a downside to a fixed rate loan. This type of agreement might come with extra fees if you decide to make full repayment before the end of the term. Always carefully check out the exact terms of any agreement before signing. Additionally, should interest rates go lower you will miss out on the savings this move would bring.

Getting a Loan: Do You Want Flexibility Or Security?

The answer to the question of flexibility or security may lie in your financial budget. Is there a chance that you may want to pay off the loan early which would reduce the total cost of borrowing?

If the penalties for paying off a fixed rate personal loan are high then perhaps a more flexible variable rate loan will suit your needs.

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Similarly, a variable rate loan may offer the possibility of topping up the amount borrowed.

Top up loans are rarely offered at the same rate as the original loan. But, if you have chosen a variable rate this will not make much difference. Contrast these options with the stability of a fixed rate loan which means you know exactly where you stand financially for a set period.

Compare Personal Loans UK: The Pros And Cons

Before you decide what kind of personal loan might be best, why not stop and consider the pros and cons of taking out a loan? Write out a list of reasons behind your borrowing needs. This may reveal whether, at this time, you would be better off staying out of debt. Things to take into consideration are the stability of employment, any potential increases in income and any current existing debts.

The Cons Of Getting a Loan

The first thing to consider is that borrowing money is expensive. There is no getting away from paying interest on the amount you borrow. Whatever you are purchasing is going to end up costing you more than the original price.

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So, if you have some savings, a far better option would be to use those to pay for whatever it is you need to buy. Interest rates on savings are very low and will never be more than interest rates on borrowing.

Secondly, think about the repayment commitment you are making. It may last for many years and will always be weighing on your finances. If you fall ill or become unemployed, a failure to make repayments could result in damage to your credit record and extra fees. It is important never to borrow money unless you are convinced that you can comfortably afford to make the repayments in full and on time.

One final thought before you get a loan; borrowing a large sum money now may limit your ability to borrow in the future. Therefore, if you want to buy a home soon, tying up your available credit on a personal loan might not be the best option. Use money advice websites if you are struggling financially. They are likely to support you in your financial decisions.

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The Pros Of Borrowing a Loan

The first benefit to borrowing is that if you need to make a large purchase now, for example, a car to take you to and from your employment, a personal loan makes this possible even if you have no savings. A fixed rate loan enables you to budget. You know exactly how much you will be paying out every month and the loan will run for a set period. You do not need to own your own home to get a personal loan. With current low-interest rates, it can be an effective way to fund a large purchase.

Compare Personal Loan Summary

In this article Personal Loans Now looks at how to compare personal loans. We discussed the finer points between variable interest rates and fixed interest rates for unsecured personal loans. We looked at the differences between the two types of loans. For example, we highlighted the benefits and drawbacks between variable interest rate loans and fixed rate loans. Finally, we discussed the pros and cons of taking out a personal loan.

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