10 tips for taking out a personal loan
For instance, how to borrow £500 more than you wanted and save £829 over five years
Wednesday 10 October 2012
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.
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