Here we’ve put together few top tips for taking out a personal loan.
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.
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.
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.
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.
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.
Check out peer-to-peer lending
If you’re anti-banks you might want to borrow from a peer-to-peer lender.
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.
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.