When is the best time to consider a personal loan
? The answer depends on your individual circumstances and what you want the loan for. Many will never have a need for a personal loan, but may use other credit products for various reasons at different points of their life. Likewise, when the time comes when you might be considering taking out a personal loan, there may be other financial options available to you.
When Might You Be Considering a Personal Loan?
Usually, people will only consider a personal loan when they have a large financial obligation to meet. This can be anything from making a ‘big ticket’ purchase such as a car or undertaking home renovations to consolidating debts
, or even paying for a big life event such as a child’s university fees, a wedding, or a once in a lifetime holiday.
All of these are legitimate reasons for potentially wanting to take out a loan or use other types of credit. The credit you use or find to be the best option for you may depend on the amount of money you are looking for and your reason for needing it. What are some of the different options available to you and what might you need to consider before taking out credit?
Drawing Down Home Equity
Depending on the status of your mortgage and the value of your home, you may be able to draw down finance against your home equity. While this is often a favourable option for many, you should consider the terms of the equity release agreement and how it may affect your children. For example, equity release typically sees the money repaid when the homeowner – yourself in this instance – has passed away, with the money coming from the sale of the property. This can therefore affect the value of the estate you may pass onto your children. While discussing what will happen when you’re no longer around isn’t always a great thought, it is something you should do in this case.
Alternatively, if you manage to find an equity release scheme that allows you to start repaying immediately, you should consider your own situation and income. Remembering that such an option is usually only accessible to over 50’s and you will be in this age bracket if you’re looking at equity release, you may be planning for your retirement, and this could mean you need to work a little longer.
Opening a Credit Card Account
You may decide to open a new credit card account, or even use an existing credit card that you have previously used only sparingly. When considering a credit card you should consider the following:
- Remember that if you’re opening a new account you might not get a credit limit that covers the spending you want to do.
- If you’re using an existing account that you have previously managed with a small balance, you will find yourself repaying more than you were previously used to doing.
- Credit card interest rates are typically variable meaning your payments may increase as well as decrease.
- Depending on how much you can repay you may find periods where all you’re doing is servicing interest and not clearing the actual balance.
If you have an existing credit card, one option you may have is to open another account that offers an introductory promotional rate. For example, if a particular card offers 0% interest on purchases for 12 months, you can use the 12 months to clear as much of the balance as possible before any interest can be applied. You might also look to apply for another card in 12 months that offers a balance transfer promotion to maintain your interest at 0%.
Remember that having a number of credit cards can affect your credit score, but if you manage these carefully and don’t miss payments you should be able to move the balance around with little trouble and save yourself on interest costs.
“One of the great things about a personal loan is that you receive the money, make your purchase, and then only have to focus on repaying at regular intervals.”
Hire Purchase Agreements
Hire purchase is a popular option when buying a new vehicle. Hire purchase is favourable as it allows you to drive a new vehicle while paying an affordable amount on a regular basis, while you can usually upgrade to a new model every three years or so. While this sounds attractive, it can also cause a problem in that you might never actually own the vehicle you drive, as you’re always making repayments. At the same time, if you take out a hire purchase agreement and plan to pay the outstanding balance at the end of year three, for example, then you will own the vehicle outright, and have the option of using another type of credit to pay this.
Loans from Friends and Family
There are numerous benefits to taking out a loan from a friend or family member. Typically, you won’t be charged anything in interest, or if you are it will usually be cheaper than what you’d find from a financial institution, and you will have some flexibility over when and how you repay. There’s also the potential benefit of not needing to pass an eligibility or credit check prior to receiving the loan.
Although the benefits are undoubtedly attractive, borrowing in this manner is fraught with danger on both sides. If there’s a disagreement over a repayment or suddenly the lender needs the money back quickly, it can cause untold stress to friendships and family relationships. There’s an old saying about only lending money to friends and family if you’re prepared to write it off, and if you’re the one looking to borrow you should think carefully about how it might affect your life.
Traditional Personal Loans
Having considered all possible available options you may find yourself back looking at a personal loan. One of the great things about a personal loan
is that you receive the money, make your purchase, and then only have to focus on repaying at regular intervals. If you take out a fixed rate personal loan you always know where you are with repayments, as they always stay the same, and you also have an end date to your obligations.
For many people, a personal loan might be the ‘cleanest’ option available, as it does not involve drawing down against home equity and does not necessarily present a risk of falling into a revolving credit trap as might be the case when using a credit card, and they own whatever they spend the money on right away. Although it is still necessary to meet repayment obligations, by choosing the loan amount and term, personal loans may provide a degree of control over what this amount will be anyway, and help ensure that this is affordable and suits the circumstances.
If now is the time to consider a personal loan or any other credit product, take the time to understand what each offers and the impact each may have on yourself.
DISCLAIMER: This article contains factual information and general comments only so does not take into account your objectives, financial situation or needs. Before taking any action, consider the appropriateness of this information having regard to your individual circumstances and always obtain and consider relevant disclosure documents before applying for a particular product.