A beginner’s guide to getting a loan
Need to replace your car? The likelihood is that you’ll borrow to pay for it. A big bill has come in a week or two before payday? Time to reach for the credit card. Want to buy that house? Well let’s face it, you’re hardly paying for it in cash. And these are just the obvious reasons for needing a loan or credit – there are a thousand other reasons why we might want to borrow money to pay for things.
The world we live in is entirely built on credit. Absolutely and utterly. It is the lifeblood of the modern age, and without having access to credit, like loans and credit cards and mortgages, life can soon become very, very difficult. And sooner or later, the time comes for all of us where we’ll need to get a loan ourselves.
If you’re thinking of going out into the world to get your first loan, it can all be a bit bewildering and overwhelming. There’s seemingly a million outfits out there offering a million different types of loan. All have different rates of interest, and all cater to the different credit scores of loan applicants like you. Some can be paid back over years, others within a month. And if all this wasn’t confusing enough, everybody you know has an opinion on loans and interest rates and finance and what’s good and what’s not. Phew!
To make life a bit easier, and to help make sense of it all, we’ve put together this first-timers guide to getting a loan. It should hopefully tell you everything you need to know, and put you in a place where you’re able to make an informed decision and pick the best loan for you and your needs.
So, loans. What? I don’t know much about them – where do I start?
You’ll have obviously heard of bank loans, and payday loans have such a bad reputation that you’ll have heard of them too. These are but the tip of the ice-berg of your loan options – there are many more out there.
Before we go into loans, we’ll explain some of the key things you need to know first before getting a loan: interest rates, credit ratings, unsecured & secured loans.
Your credit rating – the score which lenders will look at before giving you a loan
To get certain types of loans, you’ll be judged on something called your credit rating – a personal financial rating system which lenders use to assess your credit worthiness.
The idea behind credit ratings is simple: the better your rating, the better loans and better interest rates you’ll be able to get. That’s because before someone gives you a loan, they’ll want to know you’re going to pay it back – your credit rating will help them to decide whether it’s safe to lend you money, or if lending to you is more of a risk.
Your credit rating is a score, in the form of a number, which will allow lenders to judge your financial background and borrowing behaviour, in order to predict your future financial behaviour and calculate how likely you are to repay your debts.
This number is calculated by looking at what people have borrowed in the past, and if they have paid things back on time. It’ll also look at whether someone has paid their bills on time, how much debt someone has, and how much money they have to their name.
I haven’t had a loan before, does that mean I have a good credit rating?
Not quite! While not having had past loans, bills to pay, or debts is a good thing in a way, it also means that there is no proof or evidence that you have a habit of paying things back on time; in other words, you’re credit invisible.
Some loan companies will be a bit wary of lending money to you, without being able to make a prediction on whether you’re likely to pay back what you owe. This means some lenders might not want to risk lending you money.
Interest rates? What are they?
In case you didn’t know, interest rates refer to the amount of extra money you’ll have to pay back to the company you got a loan from, on top of the money you borrowed. They are a kind of fee/charge you’re charged for getting a loan.
The lower the interest rate, the better – lower interest rates on a loan mean less money you’ll have to pay back, on a loan which is more affordable.
An unsecured loan is given to you entirely on the back of your credit rating and credit history – in other words they are reputation based. If you have a good credit score, and a healthy financial history of paying things back on time, like your mobile phone bills, previous loans, and credit card payments, lenders will almost always trust you to borrow larger sums of money at lower rates of interest.
This goes the other way too. If you’ve missed payments and been unreliable in the past, lenders won’t be like it – in this case you’ll find your applications for the best loan deals from lenders like the big-name banks will be rejected.
A secured loan is a loan which you can apply for, on the condition you have something to secure your loan against. This is known as collateral.
Secured loans will expect people applying for them to put forward something like a car or house, so that if you don’t keep up your loan repayments, they can seize it and get their money back. For this reason, care should be taken before getting one – financial experts usually advise against getting them. More information can be found on the Money Advice Service.
What kind of loans are there? The main types of loans explained, from big-name banks to payday loans
Let’s start with a normal high street bank loans: quite simply they are the best option out there in almost any instance. Through a high street bank, like HSBC, Barclays, Lloyds or the Halifax, you can get an unsecured loan which will allow you to borrow anywhere from £1,000-10,000 which you’ll need to repay over 1 to 5 years.
These types of loans offer the best interest rates around. The downside to a bank loan is that these types of loans are hard to get – you’ll only be able to get them if you have a good credit score, and a good credit history for a bank to judge you on.
For someone who is getting their first loan, the lack of this kind of financial history on which a bank will measure you means that you probably won’t be accepted. That isn’t to say you shouldn’t try, though – if you’re applying for a loan with your own high street bank that you or your parents have been with for years, there might be some kind of starter loan or credit for first-time borrowers that they can offer you. Make them your first point-of-call.
The other type of loan you’ll have heard of are payday loans – a short-term loan which can be taken out over up to a month. They are easy to get but their high rates of interest make them horribly expensive. And as many who have taken payday loans have found in the past, things can go bad very quickly if you find you can’t pay back what you borrowed – there are thousands upon thousands of true stories about people who have ended up owing four or five times what they borrowed because of late payment fees and charges.
Guarantor loans sit in the middle of these two types of loans. Like bank loans, you can borrow larger sums of money – usually up to £7,500 – over 1 to 5 years. This makes them flexible and useful for a number of different uses. Their rates of interest are higher than a normal high street bank loan, but they are available to people with not so great credit scores, or people who haven’t had a loan or credit before.
The condition with a guarantor loan is that to get one you’ll need to find someone to be your ‘loan guarantor’. In other words, someone who will agree to be responsible for any loan repayments you don’t pay – the same as if an estate agent asked you to find a guarantor for a flat or house you wanted to rent.
Why do you need one?
Before getting a loan, it’s important to think first about why you need one?
Financial experts say that we shouldn’t take out a loan unless it’s for something important. Buying a car falls into this category, as does borrowing to cover the cost of getting furniture for a new house, maybe. Borrowing money to pay for a new wardrobe, go on a few nights out, or buy anything you want but isn’t essential to your life, is wasteful, and a bad idea.
Basically if you want something but can’t afford it, and you don’t need it, then don’t get a loan to pay for it. Do without. This, or save for it instead – there are few things out there which are really only available for a limited time only. What’s a few months?
Don’t borrow more than you need
If you need to borrow £2,000 to get a car, borrow £2,000. Need £1,000 to cover the cost of furnishing a flat or house? A loan of £1,000 will do just fine. Don’t borrow more.
Borrowing more than you need is a tempting idea – who doesn’t like the idea of having a spare stack of money in the bank, after all? But the downside to this is that all that lovely money will eventually have to be repaid, with interest. And it’s virtually a given that all the extra money you borrow will end up being frittered away with little to show for it afterwards – something which will be on your mind constantly as you grudgingly pay it back.
Always meet your loan repayments on time. Don’t think you can? Don’t get a loan
Last but not least, give some serious thought to both your future ability and willingness to meet your loan repayments.
When we’re desperate to get our hands on a loan to pay for whatever it is we need to pay for, it’s easy to forget that the money will need to be repaid. And if it’s a larger loan you’ll be borrowing, it will prove to be a financial commitment that you’re stuck with for a long time.
Before signing on the dotted line for any loan that you apply for, make sure you’ll be able to afford to pay it back, and that you’re committed to doing so. Many, many first-time borrowers have taken out their first loan, only to give up paying it back properly 6-12 months down the road. This can lead to bad credit, defaults and CCJ’s, all of which will make your life very hard for a long time.
If you show that you’re unreliable when it comes to meeting loan repayments and financial obligations, this will show up on your credit score. And as anybody who has struggled with bad credit will tell you, it is easy to get a bad score but difficult to rebuild it again in the eyes of potential future lenders.
Shop around for the best interest rates
If you were on the lookout for a new laptop, music player, mobile phone contract, or a pair of shoes, you’d definitely shop around for the best price first – loans are no different.
Shopping around for a great deal on your loan can and will save you a lot of money in the long-run, especially if you’re borrowing a larger sum of money with a longer repayment period. And the sheer number of lenders in the loans markets, for all types of loans, means you’ll find that interest rates can vary greatly between different companies.
- In case you were wondering how to go about this, it’s worth understanding your current credit position, you can do this either
- Speaking to your bank, you’ve no doubt had an account with them for a while and they’ll be able to score you on how your account is being used, they may be able to help
- Using free credit report services to help[ you understand your credit rating, such as noddle.co.uk, Clearscore.com or Experian.co.uk
- Here are a few ways to research and find the best loans & rates available to you
- Read our guide on types of loans and search for it on Google
- Initially use price comparison sites like MoneySuperMarket.com and CompareTheMarket.com to see what’s available and allow you to compare rates easily
- Once you have found the right lender look at independent review sites, like TrustPilot.com, Feefo.com, and Revoo.com. Also, physically search out reviews online about a potential lender
- If you’re happy with your selection, then proceed
- If you’re still unsure
- Speak to your bank or a financial advisor
- Ask your Mum or Dad – while the advice won’t be expert, as such, their own experiences in getting a loan may come in handy
- Ultimately, a loan may not be right for you. If this is the case, work out how much you can afford to save each month, create a savings plan and stick to it – the money will soon grow!
Getting a loan is a big deal, even for those who’ve been there and done it in the past – for those like you who are new to it all, it’s one of the biggest life decisions you’ll have made so far. That’s why it’s so important to make such a decision from an informed position of strength.
There is much to consider before signing on the dotted line for your chosen loan, and hopefully this article has gone some way to explaining the basics. All the same, it wouldn’t hurt to do a bit of research online to learn more about all things loans – the internet has a huge amount of helpful and reliable advice on the subject.
As with anything you’re doing for the first time, getting a loan can be a bit of an intimidating experience. Try not to worry too much, though – so long as you do your homework before and meet your repayments after, everything will be fine.
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