When getting a loan, many of us don't know how they work or how much we should ask for, unless the money is going toward a specific purchase.
How much you want to borrow and how long you want to pay it back should really depend on how much you can afford. The problem is that the lenders try to tell you how much of a loan to take out. This is because their interest rates change depending on how much you want to borrow. With a higher interest rate, for example, the interest on a loan of GBP1,000 could be as high as 20%. For loans of GBP20,000 or more, the interest rate is in single digits.
You might figure out from this that you can get a lower interest rate if you borrow more money. But if you do this, you will have to pay back the larger loan over a longer period of time so that you can afford the payments. This will give the lender a steady income for the length of the loan, which could be 5 years. You could have paid off your original smaller loan in a year or two if you had taken it out.
If you take out a loan, no matter how much it is or how long it is for, you may need to look into payment protection insurance. It won't just protect you if you can't work because you're sick or because your job is being eliminated. The main thing it will do is make your loan more expensive. So, if you chose the bigger loan, you will find that the insurance is a lot more than it would have been with the smaller loan.
If you think the payment protection will give you peace of mind in case something bad happens, there is one thing I will always tell you: Read the fine print. By doing this, you may find that some of the clauses in the fine print won't cover you if you buy the insurance that the loan lender is offering. For example, if you are self-employed or have a short-term contract, you may find that the terms of the coverage don't meet your needs in the fine print. Which means you'll have to pay money for a protection plan that won't help you.
If your finances improve during the term of your personal loan, you may be able to pay off the balance without having to pay a fee. Ask your loan provider for more details. Read all of the loan's terms and conditions, especially the fine print, before you decide to take it out.
