Loans Guides

Do you need a loan?

Is getting a loan the right choice for your circumstances? We explore alternative options… (Updated 23/7/09)

Being in debt used to be something we all avoided; people saved up when they wanted something and only bought it when they had enough.

But in today’s consumer credit society being in debt has become the norm, with people buying on credit cards and taking out loans rather than saving.

Alliance Leicester Unsecured Loan

Company	% Typical APR
	Borrow between £7,500 and £15,000 with Alliance & Leicester, 8.0% APR typical.

If you’re considering taking out a loan, follow our guide to make sure you’ve asked yourself all the right questions before adding to the UK’s debt mountain.

Do you really need a loan?

Loans are expensive and you’ll always pay back substantially more than you borrowed for your loft extension, new car or exotic holiday.

Because of this, you should only take out a loan if you really need the money urgently. Otherwise you’d be much better off tightening your belt for a few months and saving up.

If you’re not used to saving, check out our guide to getting into the savings habit for hints and guidance tailored to your personality and see our best savings rates – top 10 tips to find out how to maximise your returns.

What is the loan for?

The most popular reason for taking out a loan is to buy a car, but you should always ask yourself if you really need a new car. Brand new cars depreciate dramatically in the first year (so economically, you’d be much better off going for a second-hand car).

Read our guide to car finance loans.

Even if your loan isn’t for a new car, debt should never be taken on lightly so always think carefully about whether or not you really need it.

Be sensible with your loan amount

You might genuinely need a loan for something important, like emergency home repairs not covered by your insurance, but don’t be tempted to add an extra £1,000 on top for that much needed holiday. You’ll end up paying for it for many months afterwards and will feel guilty for getting yourself into more debt.

Can you afford the repayments?

Because of the way that loans work - with interest to be paid and penalties for late repayments - the cost of taking out a loan you can’t afford to pay back will soon add up. In addition to this, regularly missed payments or defaulting on a loan will have repercussions on your credit rating for some time afterwards. This will make it more difficult for you get other financial products in the future such as credit cards, other loans and even a mortgage.

Use savings first

People like the idea of having some money put away and because of this, many will readily take out a loan or spend on a credit card but leave their savings intact.

While it is good to have savings, loans will always charge more in interest than you’ll make on your savings, so you’ll essentially be paying extra money in order to leave your savings untouched. It is definitely better to dip into your savings than take out a loan.

Look for alternatives

If you don’t have any savings that you could dip into, instead of taking out a loan, look for other alternatives instead. You could use an interest free credit card, where, as long as you pay the balance off in during the interest free period, you’ll essentially be getting free credit.

However, if you think you might not be able to clear the debt in the designated time, don’t risk this form of funding. The amount you’ll be paying in interest after the promotional period is likely to be somewhere in the region of 17%.

Budget

You should get into the practice of keeping an up-to-date budget even before you consider taking out a loan as it will help you to keep in control of your finances and spot trouble before its too late.

Your post-loan budget should take account of all monthly outgoings, including your loan repayments, rent or mortgage repayments, utilities and other bills as well as personal spending. In addition to this you should allow for any possible, reasonable, interest rate increases that could affect things like mortgage and loan repayments so that you don’t fall short a few months down the line.

A loan might be the best type of credit for you

While alternatives to loans such as interest free credit cards can save you money, they’re not the best choice for everyone. If you’re likely to be easily tempted, a loan which is of a set amount might be a much better choice than a credit card with a limit you haven’t yet reached.

At the same time, if you already have a poor credit rating, you might be required to secure your loan against your home - posing a much greater risk if you miss any repayments.

And, if you’re already facing financial difficulties, getting yourself into even more debt - for whatever reason - is not a good idea. You should seek professional advice from either Citizens Advice (www.citizensadvice.org.uk) or the Consumer Credit Counselling Service (CCCS) (www.cccs.co.uk) - both can offer independent, expert advice.

Or visit our debt centre for more tips and advice on solving your debt problems.

Compare loan providers

If you’ve had a careful think about the pros and cons of taking out a personal loan, make sure you compare providers before signing on the dotted line. Don’t just take the first offer from your bank as this is unlikely to be the most competitive loan available. Look at high-street banks as well as online-only loan providers; by putting in the time you could save yourself hundreds, if not thousands, of pounds.