What kind of loan do you need?

If you live in the UK and are considering borrowing money for any reason, you may have considered contacting one of the companies that advertise their lending services on TV.

But these companies are actually advertising debt consolidation loans which may not suit your requirements. Even if you have debts, if you have no difficulties meeting the monthly payments and your debts are not rising due to living beyond your means, there are other types of loan which may suit you better.

These may have an element of debt consolidation built into them because you want to re-structure any existing credit arrangements, and it simplifies your finances to take your current credit facilities (loans, debts or credit cards) across to the new borrowing arrangement. But your real aim is the holiday, car or garden landscaping project you always wanted.

Various loan options exist and you should think about which one will suit you best, especially whether you can afford the payments and how much you will end up paying in total over the lifetime of the loan.

You may prefer a standard personal loan where you borrow the money over a fixed period. The advantage is the payments are predictable, the interest rate and the loan a set end date. The disadvantage is you may be penalized if you decide to restructure your finances again earlier or if interest rates drop sharply.

An alternative is a flexible loan which allows you to borrow and to pay off as much as you like without penalty up to an agreed limit. This allows you to re-structure your debt without the painful process of filling in further forms. But you normally pay a higher rate of interest and the interest levels are not fixed. They could go up. You are also required to pay a fixed proportion of the capital amount or a minimum amount, whichever is higher, and these amounts are higher than you would pay on a credit card, which otherwise offers a similar facility.

Finally, you may choose a ‘lifestyle’ loan which works like a standard personal loan but allows you to make additional payments (up to a certain % per year) or take payment holidays when you need to – Christmas time or during the summer holiday period. This is a reasonably flexible arrangement which is probably particularly suitable to younger families.

If on the other hand you are having financial difficulties due to debt and have built up a variety of debts over time, you should consider whether or not to take out a debt consolidation loan. Normally, this is a secured loan based on your property and works like a second mortgage. You need to think carefully before you do this, because if you don’t maintain the payments you can lose your house. In some cases, this will mean applying the financial brakes in other parts of your life. But the primary advantage of these loans is that you reduce your overall monthly out goings which can help you put your finances back on their feet.

Debt consolidation is not the only option and you should also consider debt counselling which is supplied by various organizations (Citizen’s Advice Bureaux, the Consumer Credit Counselling service, the Community Legal Service (England and Wales) or call the National Debtline on 0808 808 4000). Also, if you have got into difficulties because of illness or due to the loss of a provider, your own lenders can also be surprisingly sympathetic about restructuring repayments. You should talk to them as well.

About the author
Tim Day, founder and developer of – online information and advice for UK consumers seeking personal and business finance products.