What is The Loan For?

Some loans are more suitable for some purposes than others. Section 3 gives details of all the main types of loan, but here are a few general pointers. Bank overdrafts and credit cards are often good choices for short-term borrowing to pay household bills, buy a new hi-fi or to pay for a holiday. Some shops offer their own credit schemes - these can be expensive, but 'interest-free' credit is usually a good deal as long as you can't buy the same goods more cheaply in another shop. Insurance company loans and bank ordinary loans are excellent for longer-term purposes, such as buying a car or paying for an annual season ticket - some employers offer free or low cost loans for this sort of thing as well. For home improvements, extending your mortgage or taking out a second one are likely to be good routes. But check out a number of loan sources before you commit yourself to one.

How much do you want to borrow?

Some lenders will give you the full amount you ask for. But others may want you to meet part of the cost yourself depending on what you want to use the loan for and on your particular financial situation. For example, a bank making a personal loan for the purchase of a new car might want you to pay at least a fifth of the cost yourself. You'd need to borrow elsewhere if you were unwilling to do this. In some cases, if you pay part of the cost yourself, you might be able to get the lender to agree to a lower interest rate.

How long do you want to borrow for?

Other things being equal, your monthly repayments will be lower on a longer-term loan than on a short one. But over the whole period the long-term loan will usually cost more than the shorter-term one. You might consider it worth tightening your belt a little so that you can afford the higher repayments on the shorter-term loan. This could be a wise move because longer-term loans tend to be a bit more risky - it's difficult to foresee your circumstances far ahead when you might not be able to manage the loan so easily as now. If you do choose the longer-term option, consider taking out loan insurance ). With some loans, there's a maximum term for the loan depending on what you want it for - for example, a bank personal loan for the purchase of a secondhand car might have a maximum term of two years.

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Credit Reference Agencies

The majority of lenders consult a credit reference agency when you apply for a loan. These agencies collect and collate information about people's lending habits from a variety of sources - for example, bankruptcy records and lists of unsatisfied County Court judgments. Lenders who use the agencies also provide information about their own borrowers' repayment histories. This includes details of loan defaults, and late or missed payments - so-called 'black' information. Most lenders also provide the agencies with 'white' information - details about loans which you did pay off within the agreed terms... see: Credit Reference Agencies

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