10 tips for taking out a personal loan

For instance, how to borrow £500 more than you wanted and save £829 over five years

The personal loans price war is hotting up. This week Derbyshire Building Society has thrown down the gauntlet to rival providers by launching a rate of 5.6 per cent on loans between £7,500 and £14,999.

According to analysts at price comparison site Moneysupermarket, this is the lowest headline rate since November 2006.

Although the Bank of England base rate has been at an all-time low of 0.5 per cent for three-and-a-half years now, loan rates have remained stubbornly high – until now.

With rates falling, we’ve put together 10 top tips for taking out a personal loan.

1. Shop around

As with any financial product, when it comes to taking out a personal loan it pays to shop around and compare APRs. The APR (annual percentage rate) tells the true cost of a loan taking into account the interest payable, any other charges, and when the payments fall due.

Your bank may say it offers preferential rates to its current account customers but you might still find there are cheaper loans available elsewhere. For example, existing Natwest customers are offered a rate of 7.9 per cent - 2.3 per cent above the rate offered by Derbyshire BS.

2. Check the small print

Before you apply for a loan, check the small print to see if you’re eligible. Some best buys come with some onerous conditions. Sainsbury’s Bank offers a loan rate of 5.6 per cent, for example, but applicants must have a Nectar Card and have used it at Sainsbury’s in the past six months. Natwest and RBS only offer their best loan rates to current account customers.

3. Think about early repayment charges

It might seem unlikely at the time when you take out a personal loan – but don’t forget that it’s possible you will be able to pay off your debt early. Many loan providers will apply a charge if you wish to do so, so it’s a good idea to check how much this might cost before you apply for a particular deal. If you think there is a good chance you will want to settle your loan early, it may be worth searching for a deal that comes without any early repayment charges.

4. Shop around for PPI

Payment protection insurance (PPI) has had some bad press but it’s still a useful product for some people. It’s designed to cover your monthly loan or credit card repayments if you are unable to meet them due to sickness or unemployment. If you decide you need this type of protection, it’s vital you shop around for the cheapest deal: buying a policy direct from your lender could still cost you far more than buying from a standalone provider. Furthermore, PPI policies often come with a long list of exclusions, so make sure you fully understand what is, and is not, covered before committing to a policy.

5. Check your credit rating

If you plan to apply for a market leading personal loan, it’s crucial that you check your credit rating first. Lenders are only required to offer their advertised 'typical' APRs to two-thirds of applicants. Therefore, if your credit rating is not in good shape, you may be offered a more expensive deal than the low rate loan you originally applied for.

6. Consider a credit card

Before you apply for a personal loan, consider other forms of credit. You might find a credit card is cheaper and a card with a 0 per cent introductory offer on purchases will enable you to spread the cost of big purchase interest-free. The longest 0 per cent deal currently is 16 months from Tesco Bank. However, if you don’t think you will be able to repay your debt within the 0 per cent offer period, you may be better off with a long term, low rate deal. Right now, the Sainsbury’s Bank Low Rate Credit Card offers a rate of 6.9 per cent APR on purchases.

7. Check out peer-to-peer lending

If you’re anti-banks you might want to borrow from a peer-to-peer lender such as Zopa. The site, “a marketplace for social lending”, links borrowers and lenders. Applicants are credit scored and you need a decent score to be accepted. Rates vary but Moneyfacts lists a rate of 6.2 per cent on a £7,500 loan over three years.

8. Borrow more

In general, the larger the loan the lower the interest rate. Due to the way some providers price their loans, there are occasions where you can actually save money by borrowing slightly more. Currently, a £7,000 loan over five years from the AA is advertised at 13.9 per cent APR with repayments of £159.58 a month. But if you were to borrow an extra £500 the advertised rate drops to 6.4 per cent APR and the monthly repayments are lower at £145.76. So borrowing the additional £500 will actually save you £829.20 over the full 60-month term of the loan.

9. Don’t apply for too many loans

When you apply for a loan online, most applicants will leave a “footprint” on your credit record which lenders check before approving a loan. Having lots of applications on your record makes you look desperate or in financial difficulties. As a result lenders will see you as more of a credit risk, so your latest loan application is less likely to be approved.

10. Know the risks of secured loans

Secured loans are cheaper than unsecured loans but you run the risk of losing your home if you don’t keep up repayments. Secured loans are only offered to homeowners with equity in their property and mean the lender effectively takes a charge on your property. So don’t sign-up unless you’re 100 per cent sure that you will be able to meet your repayments – this type of loan is basically less risky for lenders but more risky for borrowers.

PROMOTED VIDEO
Life and Style
techYahoo Japan launches service to delete your files and email your relatives when you die
Life and Style
Child's play: letting young people roam outdoors directly contradicts the current climate
lifeHow much independence should children have?
Arts and Entertainment
Tycoons' text: Warren Buffett and Bill Gates both cite John Brookes' 'Business Adventures' as their favourite book
booksFind out why America's richest men are reading John Brookes
News
i100
Arts and Entertainment
<p><strong>2008</strong></p>
<p>Troubled actor Robert Downey Jr cements his comeback from drug problems by bagging the lead role in Iron Man. Two further films follow</p>
filmRobert Downey Jr named Hollywood's highest paid actor for second year running
Life and Style
Dale Bolinger arranged to meet the girl via a fetish website
life
Property
Sign here, please: Magna Carta Island
propertyYours for a cool £4m
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Training Programme Manager (Learning and Development)-London

    £28000 - £32000 per annum + benefits: Ashdown Group: Training Programme Manage...

    Training/Learning and Development Coordinator -London

    £28000 - £32000 per annum: Ashdown Group: Training/Learning and Development Co...

    Business Anaylst

    £60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

    Project Manager - ETRM/CTRM

    £70000 - £90000 per annum + Job Satisfaction: Harrington Starr: Project Manage...

    Day In a Page

    Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

    The 'scroungers’ fight back

    The welfare claimants battling to alter stereotypes
    Amazing video shows Nasa 'flame extinguishment experiment' in action

    Fireballs in space

    Amazing video shows Nasa's 'flame extinguishment experiment' in action
    A Bible for billionaires

    A Bible for billionaires

    Find out why America's richest men are reading John Brookes
    Paranoid parenting is on the rise - and our children are suffering because of it

    Paranoid parenting is on the rise

    And our children are suffering because of it
    For sale: Island where the Magna Carta was sealed

    Magna Carta Island goes on sale

    Yours for a cool £4m
    Phone hacking scandal special report: The slide into crime at the 'News of the World'

    The hacker's tale: the slide into crime at the 'News of the World'

    Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
    We flinch, but there are degrees of paedophilia

    We flinch, but there are degrees of paedophilia

    Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
    The truth about conspiracy theories is that some require considering

    The truth about conspiracy theories is that some require considering

    For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn
    Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

    Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

    Meet the man who doesn't want to go down in history as the country's last Scottish Secretary
    Legoland Windsor's master model-makers reveal the tricks of their trade (including how to stop the kids wrecking your Eiffel Tower)

    Meet the people who play with Lego for a living

    They are the master builders: Lego's crack team of model-makers, who have just glued down the last of 650,000 bricks as they recreate Paris in Windsor. Susie Mesure goes behind the scenes
    The 20 best days out for the summer holidays: From Spitfires to summer ferry sailings

    20 best days out for the summer holidays

    From summer ferry sailings in Tyne and Wear and adventure days at Bear Grylls Survival Academy to Spitfires at the Imperial War Museum Duxford and bog-snorkelling at the World Alternative Games...
    Open-air theatres: If all the world is a stage, then everyone gets in on the act

    All the wood’s a stage

    Open-air productions are the cue for better box-office receipts, new audiences, more interesting artistic challenges – and a picnic
    Rand Paul is a Republican with an eye on the world

    Rupert Cornwell: A Republican with an eye on the world

    Rand Paul is laying out his presidential stall by taking on his party's disastrous record on foreign policy
    Self-preservation society: Pickles are moving from the side of your plate to become the star dish

    Self-preservation society

    Pickles are moving from the side of your plate to become the star dish
    Generation gap opens a career sinkhole

    Britons live ever longer, but still society persists in glorifying youth

    We are living longer but considered 'past it' younger, the reshuffle suggests. There may be trouble ahead, says DJ Taylor