Everything you need to know about finding the best value personal loan possible.
Nowadays it can seem that wherever you turn someone is offering to lend you money, this can make navigating the vast number of lenders on the market incredibly difficult, especially as picking the right loan isn't always as simple as going for the the lowest rate. So to make borrowing a little more straight forward here's our guide to finding a personal loan that's right for you.....
Navigating APRs
When you start searching for a personal loan you'll find that most lenders try to attract your business by advertising a 'fantastically low' typical APR (Annual Percentage Rate); this figure represents the standard rate of interest a company's loan customers are paying including standard fees. While in theory this does help you to compare loans on a like for like basis there are several points you should take into consideration before simply applying for the lowest rate loan you can find.
Firstly you have to remember that the rate advertised as a 'typical APR' is just that, only 2/3 of the banks customers actually have to be borrowing at the headline rate for it to be advertised as 'typical'. As the vast majority of loan providers calculate the rate of interest you'll pay based on the 'risk' associated with your personal circumstances, there is a distinct possibility that you may not be offered the standard APR but instead a much higher rate of interest on your borrowing.
Secondly, loan providers have cunningly devised a way to lower their headline rate as a means of attracting new customers. They do this by being highly selective during the application process and simply rejecting customers who do not fit their lower rate criteria. For this reason, if you don't have a golden credit record it can often be better to apply for a loan with a provider advertising a slightly higher APR as their acceptance rate is probably a whole lot higher too.
It often works that the more you borrow the lower rate of interest you're charged, while this isn't an excuse to borrow thousands extra it's definitely worth bearing in mind when working out which loan best suits your personal circumstances. The headline APRs advertised by many loan providers only apply to borrowing over a certain amount so it's worth checking the small print before you apply. Additionally, interest rate boundaries tend to be fixed at set figures (i.e. £100s) so obtaining a 'rounded off' quote may be beneficial if the difference isn't that great from your intended borrowing.
Finally, navigating APRs can be a little confusing as they don't tell you how much you will be actually be paying. By comparing the total amount repayable (this sums capital and interest repayments) for a loan alongside the estimated monthly repayments you'll have a much better idea of how different loans compare as well as how much you can realistically afford to borrow, over what time scale.
Repayments
Most providers now fix the rate of interest you'll be asked to pay on your loan, this means that your monthly repayments will be identical throughout the term allowing you to budget effectively. However, the longer the term of the loan the more interest you'll end up paying. So, although it can be temping to spread out your borrowing or to borrow more than you really need, by working out how much you can reasonably afford to pay back each month and deciding on the shortest term that meets this criteria you'll end up saving yourself a fair amount.
Along these lines many providers offer you an optional repayment holiday at the start of your loan. While this may seem like an enticing proposition its actually a cunning way for them to add an extra couple of months worth of interest to the term of your loan. If you have the option to say no to this 'kind offer' do so.
Fees and penalties
The vast majority of people don't make it to the end of their loan term, either choosing to settle early or refinancing their borrowing. However, some providers tie you in and charge you an extortionate cancellation fee, somewhere along the lines of two months repayments if you try to move. On this basis it can be much better to take out a personal loan with a lender who offers more flexible terms that allow you to make over and early repayments as this means you still have options available to you. You may find that lenders offering slightly higher APRs are more flexible with their terms too which is why it definitely pays to shop around.
Although APRs have to reflect standard loan charges you should also be aware of the other fees that loan providers may try to charge you. For instance a 'delivered tomorrow' courier fee is likely to cost you somewhere in the region of £30 to £40 which is a slightly extortionate amount just to have the money a couple of days early. Some providers may also charge a let down fee whereby they impose a standard charge to cover the cost of them transferring the money to you. Additionally, it goes without saying that lenders will charge a late or missed payment fee, however most do now require you to set up and pay by direct debit so this takes part of the risk away.
PPI
These days if you manage to get through a loan application without being offered PPI you can consider yourself to have witnessed a miracle. PPI or payment protection insurance is designed to cover your loan repayments if you are unable to do so because of accident, sickness or unemployment.
While this sounds like a good idea in theory, loan providers do tend to charge you the earth for this cover, adding more than a significant amount to the cost of your loan that isn't reflected in the APR. Additionally the terms and conditions of these policies tend to be very restrictive and may not necessarily pay out when you need or expect them too. If you are overly concerned about missing repayments its usually a far better option to take out a policy that covers all of your financial commitments rather than obtaining one singularly for each.
So...
In conclusion, while finding the right loan for you isn't as straight forward as it may seem, by being aware of the possible pitfalls of loan applications you're in a far better position to compare personal loans on a like for like basis and really choose that one that is going to give you the best deal.
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