When to take out a loan - and when NOT to...

Even at record low rates, loans are not always the best option.



There are lots of good reasons to take out a loan - especially as personal loan interest rates have plummeted to some of the lowest levels ever seen over the last few weeks.

Since the start of January, 13 providers - AA, Cahoot, Clydesdale Bank, HSBC, M&S Bank, Nationwide, NatWest, RBS, Sainsbury's Bank, Santander, Tesco Bank, TSB and Yorkshire Bank - have cut loan rates, with Yorkshire and Clydesdale Bank slashing rates by as much as 2.0%.

And according to analyst Moneyfacts, the current HSBC and M&S Bank rate of 3.3% for loans of £7,500 over five years is the lowest rate ever recorded.

Rachel Springall at Moneyfacts said: "There is now a full-on war between providers who are slashing their loan rates to attract new borrowers."
Not all loan rates are low, though. Many payday loans, for example, continue to come with sky-high interest rates and onerous charges for anyone who wants to pay them off early or misses a payment date.

And even low-rate loans are not a good option for all borrowers. So when should you take out a loan? And when should you avoid one?

When to take out a loan
Good reasons to take out a loan include buying a car and consolidating your debts. Here's a list of times when a loan can prove a sensible option, and why.

Debt consolidation
A low-rate loan can be a great way to reduce the interest you are paying on your debts.

It should make it easier to stay on top of how much you owe, while signing up to fixed, monthly payments will enable you to budget and show you exactly when you will be debt free.

"Starting a new year is the perfect time for consumers to re-visit their finances and see whether using a competitive loan to consolidate more pricy debts can be a money saver.," Springall said.

Home renovations
It's not always possible to pay for big-ticket purchases such as an extension or a new kitchen in one go.

A low-rate loan can be a great way to spread the cost over say three or five years. For smaller amounts that you can repay within a shorter timeframe, however, it's worth considering a credit card charging 0% on purchases.

Car purchase
A lot of motorists use personal loans to stretch to a better car, which can be sold to pay off the loan should the repayments become unmanageable.

Remember to check the early repayment penalties if you do end up doing this, though. It may well be cheaper to keep the cash in an account and use it to cover the repayments rather than paying off the whole amount in one go.

When NOT to take out a loan
There is no point taking out a short-term loan to see you through until payday if you will be in the same position this time next month.

Taking out a loan to cover the cost of a new wardrobe, for example, is also likely to land you in financial hot water.

Cash flow crisis
A payday loan may seem like the answers to your prayers when you run out of money. But loans of this kind come with huge interest rates that will eat into the money you have coming in - and could leave you in deeper trouble next month.

Arranging an overdraft with your current account provider is a better option - especially if it offers an interest-free overdraft buffer zone.

Spending spree
Taking out a loan just to go shopping is likely to leave you wondering what you spent the money on as you continue to pay for it years down the line.

Many credit cards now offer 0% on purchases for a set period - say nine or 12 months - and are a much cheaper way to cover the cost of a splurge, as long as you pay them off within the interest-free period.

"As long as customers make sure to pay off credit cards before interest applies, they can save hundreds of pounds using a 0% card," Springall said.

How to Benefit from a Personal Loan

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