Categories
Loans

What can I use a personal loan for?

Have you been thinking about borrowing money? You are not alone.

It is not unusual if you find yourself short of the cash you need to make a big purchase or alleviate the financial challenges you might be going through. Many other people are experiencing the same difficulties. According to a report by the Bank of England, the number of people taking out various types of personal loans in the UK has been increasing steadily over the years.

For the purposes of definition:

A personal loan is a loan that is not secured against your property or another asset, and is granted based on your income as well as your credit history. It is repaid in monthly instalments over a specified period.

People apply for personal loans for all kinds of reasons. However, if you are considering getting a loan, it is crucial to know whether the reason you are taking a personal loan is justified…

What can you use a personal loan for?

First up, there are no restrictions on the purpose of taking a personal loan. You can use it to buy anything. However, you should take it only if you have no other options and only when you know you will be able to repay it.

The top uses for a personal loan in the UK today include:

  • Home improvement

Remodelling your house can be expensive. Luckily, with the right personal loan, you can have your house looking as good as new. You can use it to finance improvements such as remodelling your kitchen, bathroom, building an extension or making repairs.

Improving your home has many benefits including increasing the resale value (if you intend to sell), personal enjoyment, as well as minimising expensive repairs that might be needed later.

  • Debt consolidation

If you are wondering whether your purpose for taking out the loan can affect your application, the answer is yes it can.

You might encounter problems with some lenders if your intention is to consolidate other debts, because you already appear to be high risk. However, it is one of the most popular reasons people take out a personal loan. If you have many outstanding loans all with different interest rates and balances, you might want to combine all those into one monthly instalment. This could reduce the overall interest rate, as well as making the repayments easier to manage, as you will only have a single payment leaving your account.

  • Making a big purchase

You might have to save for months, sometimes even years, to be able to buy a car, go on your dream holiday, or pay for your wedding. Personal loans help you get things done quicker and save money that would be spent on other short term solutions for example, paying for train fares.

  • Unexpected expenses such as a broken appliance

Often important household appliances such as a washing machine or cooker can break at the most inconvenient of times. They are essential to your daily lifestyle but your emergency funds might not be enough to cover all the costs involved in replacing or repairing them, and you will have to look for other ways to do it. Applying for a personal loan will help you finance any unplanned expenses.

When should you not apply for a personal loan?

Even though there are no restrictions on taking out personal loans, there are some instances that you shouldn’t apply for it. For example:

  • If you are financially unstable

Are you expecting some negative changes to your income or employment soon? If yes, then this might be a bad time to be considering taking out a loan. If the reason for looking for a loan is not time-critical, then you might opt to open a savings account and/or start minimising your expenses to gradually accrue the required money.

  • If you will not profit

It may sound obvious – but please don’t take a loan just for the sake of it. You will end up paying back the money spent on a bad investment. Have a clear plan and purpose before applying for the loan.

  • If you can save enough money

Is your purpose for taking out the personal loan urgent? If you want to spend the money on your dream holiday, which you know you could afford if you saved the money, then don’t apply. You can book the trip early and pay in monthly instalments or open a holiday savings account to help finance it.

What you should consider when taking out a personal loan?

Many institutions are offering personal loans in the UK. You should select the one that helps you achieve your financial goals. Consider these factors to help you choose the best lender.

  • Amount – Different lenders have different minimum and maximum amounts that one can borrow.
  • Interest rates – It is among the first things to check. Only take out a loan that you are completely sure you will be able to afford to repay. As much as possible, try to avoid being in debt. Choose a lender whose interest rates are lower and has short term repayment.
  • Fees – Some loans come with no fees while others have them. The fees add to the principal and increase the loan amount and repayment.
  • Loan terms – Check the duration of repayment. Loans with shorter repayment periods have less interest compared to long term ones.
  • Annual Percentage Rate (APR) – The best loans have the lowest APR because they are the least expensive.
  • The flexibility of repayment – Check if you are allowed to pay more than the required monthly instalment amount or if you can repay the entire amount early without being penalised.

Final words

Personal loans can be a lifesaver, especially when you need money urgently. However, you should be careful when applying. You must always be aware that they have to be repaid in the end, with interest. Evaluate the reasons why you want to take out a personal loan to decide whether you have to borrow or not. If you have to apply for a personal loan, ensure you choose the best lender.

Sources:
Growing Power
Moneysupermarket
Money Advice Service

Categories
Credit

The differences between charge cards and credit cards explained

Cash use is falling dramatically in the UK as more and more of us prefer the convenience of using plastic over notes and coins. But whether you choose to pay with a charge card or a credit card will depend on your individual needs and circumstances.

The key difference between a charge card and a credit card is that, with a charge card, you have to pay the balance in full every month. Charge cards don’t offer credit but there is no spending limit or interest charged as long as you repay what you’ve borrowed in full and on time.

By contrast, credit cards have a set credit limit and interest will be applied each month to the balance which remains. Some credit cards come with a 0% interest offer but this is usually only for a limited time and will only apply to purchases with interest kicking in after the initial period.

Who is a charge card best for?

American Express is the best-known provider of charge cards in the world. A lot of businesses use charge cards and to be eligible for a personal charge card, you usually have to earn over a certain amount and have a good credit rating.

Charge cards are ideal for people who don’t want to pay interest every month and they are very convenient for those who spend a large amount or anyone who has to make an expensive purchase which may have gone on their credit card.

Charge cards often come with many attractive perks such as discount and reward schemes. The more exclusive charge cards offer extras like concierge services, travel insurance and access to airport VIP lounges.

A charge card will usually come with an annual fee, but often the value of the perks on offer will offset this. If you don’t repay the bill in full though you will be hit with charges and interest added to the amount due. Paying late could also impact your credit score and the card could be cancelled.

Who is a credit card best for?

Charge cards are not suitable for borrowing money for longer than a month, because the balance must be paid in full at the end of the month. A credit card is suitable for lending over a longer period and could be a better option if you simply don’t have enough cash to repay the balance within a single month.

Each month, you will have to repay a minimum of one percent of the credit card balance. Credit cards offer cash advances enabling you to withdraw money out of an ATM. Beware though, as usually the charges for this are quite high and it can be an expensive way of borrowing cash.

Credit cards are available in the UK for everything from bad to excellent credit scores which makes them much more accessible than charge cards. Fees, interest rates, credit limits, and rewards vary markedly depending on the credit history of the applicant.

This means that the best rates are only available to those with good credit scores or who meet minimum income requirements. The credit card provider will set a credit limit based on their own assessment of the customer’s financial history and risk profile.

There are lots of credit card providers out there meaning the range of product features and perks available, offer a much greater choice than for charge cards. Some credit cards come with a range of benefits such as cashback on purchases and points which can be converted into vouchers for spending at shops, hotels, and airlines.

Other key differences between charge cards and credit cards

Another key difference to consider between a charge card and a credit card is the protection afforded to credit card purchases under UK legislation. Credit card spending is protected by Section 75 of the Consumer Credit Act. The card issuer is held just as liable as the retailer if the goods are faulty or the retailer goes out of business. The consumer is entitled to claim a refund from the credit card provider on purchases made between £100 and £60,260.

Charge cards are not protected by the same legislation but the big providers have their own protection schemes. American Express, Visa and Mastercard enable customers to claim for a refund if something goes wrong within 120 days of the purchase being made.

Both credit cards and charge cards can impact your credit score but also help you build it. When you apply for a charge card, the issuer will usually run a ‘hard’ credit check which will stay on your file for two years. The impact of this on your credit score is usually minor, however.

Use of a credit card can have a much greater impact on someone’s credit rating. The amount of credit you have remaining on the card is a significant factor in how the credit reference agencies assess your creditworthiness. A lower balance compared with your credit limit is considered by creditors to be a positive as it demonstrates you can use the credit card responsibly without relying too heavily on it. As charge cards don’t come with a present spending limit, it isn’t possible to determine how your usage has impacted on your apparent creditworthiness.