There are many types of loans on the market and it can be very confusing knowing which is the best to choose. Some loans are specifically designed for certain types of lending, such as a mortgage for buying a home and a student loan for university fees. However, there are other sorts of loans which do not seem to be designed for a specific purpose.
When looking at getting a loan it is worth starting by looking at the amount that you want to borrow. You will find that you will need to know how much you want to borrow in order to choose the right loan. Some loans will offer too much and some not enough you see. It is always wise to borrow the smallest amount that you can. You will pay for the borrowing and the less you borrow the lower the cost of the borrowing. This means that you need to see if you have any savings that you can use as this will be cheaper than borrowing money. Also think about whether you really need to borrow the money as you could save a lot if you do not get a loan in the first place. It is wise to save up for items rather than borrow money and only use loans for an emergency – in most cases.
Once you know how much you need to borrow you can take a look at your options. Personal loans tend to be for larger sums of money, perhaps thousands of pounds. These might be used to purchase a car or an extension on your home. If you do not need that much money, then it can be wise to look for a different type of loan as you could end up borrowing a lot more than you actually need. A personal loan has a fixed term and fixed repayments. This means that you will have to pay back a certain amount each month. This could be better for some people as they will know what they are paying, although they are usually on a variable interest rate and you may need to pay back more or less should the base rate change. It is really important though to make sure that you have enough money to cover the repayments.
If you want less money then a credit card could be the answer. These will usually allow you to borrow hundreds of pounds, although this will depend on your credit rating and your salary. You may be able to borrow thousands on a card. You will need to make sure that you pay at least the minimum off each month though. Usually you have to pay back at least the interest each month on what you have borrowed. This has advantages in that it is flexible as you can choose to pay back the debt when you are ready. However, every month that money is not paid, you will be charged interest on it. The interest rates on credit cards tend to be high compared to personal loans, so if you think that it will be a long time before you pay back the debt it could be a very expensive way of borrowing.
An overdraft tends to be used in emergencies when you need extra money before you get paid. It will automatically be repaid as soon as money appears in the account. These have high charges and unauthorised overdrafts can be the most expensive type of debt there is. It is therefore wise to avoid using them if you have cheaper options available to you.
Some people, particularly those with poor credit ratings, tend to use payday loans to borrow money. These have to be paid back in full on payday and so you will only borrow small amounts of money. They are used to cover emergencies but if you cannot pay it back on time can be very costly. Therefore they are best used with caution.
So the best loan for you will depend on the purpose and amount that you need to borrow. It is wise to avoid borrowing if you can, but if you do want to borrow consider how much you want and which loan will allow you to borrow that amount. Then compare them to see whether you would rather use one that you pay back immediately, regularly or is more flexible. Consider the cost as well to see which will be cheaper for you.