Personal loan - what factors to consider

Cost.

You must check all costs.  For fixed term borrowing, such as personal loans, and flexible borrowing, like credit cards, you should compare the annual percentage rates (APRs).  Loans with high APRs are more expensive than loans with low ones, as you would expect, but with credit cards, if you expect to pay off the balance in full every month, you wont pay interest, so you can ignore the APR.  However, you must bear in mind that credit cards which charge a lower interest rate on a balance transferred from another card may use your monthly payments to pay off this cheaper credit card fist, rather than any new borrowing, which is charged at a higher rate.

Try considering credit cards without any annual fee, unless other features such as loyalty points or free insurance outweigh the cost.  Include the cost of any loan protection insurance you decide to take out and don’t over look less common forms of credit, such as credit unions.

Your commitment.

Think about whether you will be committed enough when it comes to repayments.  Think about how much you must pay, when and how often.  Could you even afford the repayments?  And would you have to put up any security for the loan?  These are all features, which you must consider.

Risk.

Be aware that if you don’t keep up with repayments then you could loose your assets, for example your home, against which the loan is secured.  Weigh up the pros and cons to decide whether it is a reasonable risk to take.  Find out whether repayments stay the same throughout the life of the loan, and if not could you afford to pay extra if interest rates rose.

Other factors to bear in mind.

Remember that you could reduce the risk of missing payments by taking out loan protection insurance.  It covers all payments for say, one or two years if you can’t work because of illness or unemployment.  But carefully check the policy terms to make sure your circumstances are covered.  All costs can vary significantly, so check and shop around as much as possible to find the best deal for you.