Loans: Things to Consider
When considering whether to take a loan you should first consider a number of things.
Firstly, what is the purpose of the loan you are considering? If the loan is being considered to purchase a non essential item, maybe a new electrical appliance or a holiday ask yourself how much importance do you really attach to these things. Any loan will have interest charged on the loan and interest rates on loans are generally charged on a compound interest basis.
Where a loan has compound interest charged on it this means that as well as paying back the loan plus interest you will pay back the loan plus interest on the interest. All lenders need to make a profit on their services so the idea of charging interest on interest is perhaps understandable. The point to realise is that the actual amount repaid to the lender can be significantly more than the original amount of the loan borrowed. With some loans the amount actual amount repaid can be as much as three times the amount of the original loan.
Since the amount you will repay on the loan will be so much more than the original amount borrowed consider whether you would be better off saving in advance rather than making the purchase and saving afterwards to repay the loan and interest save in advance and make the purchase when you have saved enough money. If you do choose to save in advance of the purchase then read some of the articles on this financial products web site and choose a savings account or a current account depending on how long you will be saving before making the purchase.
The are a wide variety of lenders out there that offer both fixed rate interest or variable rate interest charged on the money that as borrowed as the loan. So if the purpose of the loan is for an essential purpose or you choose not to save before making the purchase consider carefully whether to choose a fixed or variable rate loan.
There are advantages and disadvantages that apply to both fixed rate loans and variable rate loans. With a fixed rate loan the amount of interest charged over the period of the loan remains constant and is generally fixed as a percentage of the initial loan amount. One big advantage of a fixed rate loan is that the borrower will always know the amount of each repayment and this can make it easier to assess whether as the borrower you can comfortably afford the repayments on the loan.
One disadvantage with a fixed rate loan is that if interest rates charged by banks are low or reduce during the term of the loan then the fixed rate of interest charged by the lender can often be more than the amount of interest charged on a variable rate loan. This of course means that you will be repaying even more back on the loan to the lender.
With a variable rate loan the interest rate charged on the loan can go up and down depending on the base rate of the bank of England . The advantage of a variable rate loan is that when bank of England base rates are low the interest rate charged on the loan will be lower than that foe fixed rate loans. Variable rate loans are therefore best considered when base rates are low and where the loan will be short term. If the loan will be repaid over a long period then it may offer the borrower more peace of mind and certainty if a fixed rate loan is chosen as you can calculate in advance the repayments and unless your financial circumstances change you will know that you will be able to afford the repayments on the loan.
It should hopefully be clear from the above that the type of loan that you might wish to apply for will depend very much on your own personal circumstances. This website features some of the best options available. If you take the time to browse some of the loan options that are available and have a look at both the fixed rate loans and the variable rate loans you will be able to get a clearer idea of which loan suits you best. If you are still in any doubt as to which loan suits your circumstances best then take advice from an independent financial adviser.
This article does not cover secured loans. There are a number of other articles within this website that cover both secured and unsecured loans.
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