Spy out the land before you ride with the loan arranger: Sue Fieldman advises caution when you are raising cash for a new car

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The Independent Online
THE AUTOMOBILE Association has sent a mailshot to its members extolling the benefits of taking out an unsecured loan.

But do not break any speed limits trying to take up the offer. You may be able to get a cheaper deal elsewhere. Lending money used to be the traditional domain of the banks, but you can now get unsecured loans from a whole range of outlets.

Advertisements are everywhere tempting you to borrow to buy a car, improve the house or go on holiday.

The loans are for a fixed term at a fixed rate of interest. You know exactly where you stand, say the lenders - usually with a hefty monthly repayment.

The AA motors into the market every year. In any one year it sends out more than two million mailshots offering unsecured loans.

The AA's promotional material says: 'If you have a major purchase in mind, or you're planning for a special occasion, you may be considering the best way to finance it. In which case an AA Member Loan may be your answer.'

It could be, but you should explore all the other avenues first.

The AA makes great play in its promotional material that there are no repayments for 'two whole months' when you take out the loan. 'We believe this could give customers a useful breathing space,' it enthuses.

A payment-free period is very nice, but you do not get something for nothing in this world. There is a price to pay.

If you want to borrow pounds 7,000 over three years the monthly repayment with the AA is pounds 273.96.

The AA charges an administration fee of pounds 60 or 1 per cent of the loan, whichever is the greater. This is added to the first monthly payment. The total cost of the loan from the AA would be pounds 9,932.56.

The AA is by no means the most expensive provider of unsecured loans. However, a personal loan with Yorkshire Bank - you do not have to be a customer - costs pounds 246.95 a month.

Total cost of credit is pounds 8,890.20. Over the three years you pay pounds 1,042.36 less than with the AA. Yorkshire Bank personal loans are available until 30 April.

You will also have to get your skates on to take advantage of Abbey National's rates. The interest rate goes up 1 per cent after the end of this month.

Lloyds Bank offers loans at a very competitive 18.1 per cent APR, and there is no time limit on their availability.

If you want to buy a loan at the same time as your lingerie, Marks and Spencer offers a good deal for account customers. They can get a personal loan at an interest rate of 18.4 per cent APR. Non-account customers pay 20.4 per cent and cannot borrow as much.

If you are tempted to open a Marks and Spencer account, the price of finance rather than the price of food could well be a deciding factor.

The vast majority of lenders push payment protection insurance when they sell a loan. The lenders have come in for heavy criticism for inertia selling - you actively have to say no to the insurance, otherwise you automatically get it.

The insurance pays the loan in the event of sickness, accident or redundancy. The lenders' enthusiasm for the cover is boundless.

This could be related to the fact that they earn hefty commissions on it. It also makes life easier for them if the borrower should fall on difficult times.

You pay an extra pounds 60.82 a month with the AA if you take out insurance. The extra cost on a loan with Lloyds Bank is pounds 29.62. An AA spokesman defended the cost of the insurance by saying it was much more comprehensive than other policies.

He added: 'It is a better product with more cover. It is optional. About 50 per cent of customers take it up.'

Most lenders collect the insurance premiums up front by adding them in a lump sum to the loan. You then pay interest on the insurance premiums as well as the loan.

Payment protection insurance is a reassurance for some people. But read the small print carefully.

At the end of the day you will have to work out whether the benefits are worth the extra cost.

----------------------------------------------------------------- UNSECURED LOANS ----------------------------------------------------------------- (pounds 7,000 over 3 years) ----------------------------------------------------------------- Monthly repayments No credit With credit Lender APR insurance pounds insurance pounds ----------------------------------------------------------------- AA 25.5% 273.96 334.78 Yorkshire Bank 17.5% 246.95 286.11 Lloyds Bank 18.1% 248.88 278.50 Abbey National 18.9% 251.09 280.70 Barclays Bank 18.9% 251.32 287.78 Halifax BS 20.1% 254.33 292.56 Marks & Spencer (a/c customers) 18.4% 249.86 285.40 Northern Rock BS 22.9% 269.17 299.99 -----------------------------------------------------------------

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