Many of us find ourselves needing to apply for a bank loan at some point in our lives. It could be to fund a necessary purchase, pay for something unexpected or manage several debts.
Taking out a personal loan doesn't have to be expensive. Follow these nine simple tips to make sure you get the best deal for you.
To get the best deal on a personal loan, start by asking yourself:
Why you need the money,
How much you need to borrow
How long you want to pay it back over.
This will help you when you’re comparing rates and looking at how much different lenders will charge you for borrowing the same amount.
If you have any savings it’s worth thinking about whether you can use some of them towards whatever it is you need to pay for as the smaller the amount you borrow the less you’ll end up paying in interest. Just make sure you keep at least enough savings to cover three months of living expenses – in case you lose your job for example.
One of the key factors that determines the interest rate you will be offered on a personal loan is your credit history. The higher your credit score, the more likely it is that you'll be offered a cheaper rate. If your credit isn't in the best shape, use these tips to improve your credit score before you apply for a loan.
If you are seen as a 'high-risk' borrower – e.g. you have a history of defaulting on payments and County Court Judgments (CCJs) – it's likely that the loan deals you'll be offered will have a higher APR as they will be specifically designed for borrowers with bad credit.
This is why it's important to check your credit rating before applying to find out whether you're eligible for cheap loans. You can do this online for free through the three main credit reference agencies in the UK:
By checking all three credit reports you can make sure there aren't any mistakes on them that could adversely affect your score and get an idea of what to expect when you apply for credit. It is also possible to improve your credit rating ahead of applying for a loan.
When applying for a loan, or any financial product for that matter, it's vital to compare what's on the market to find a deal that's right for you.
When you compare loans, it's important to look at the loan rates and total cost for the amount you need to borrow from all the loan providers in the market, which you can do by using more than one comparison site.
You will need to look at the representative APR quoted to compare deals as this will show you the cost of the loan including the interest rate and any charges. At least 51% of borrowers will be offered this rate or lower but the rate you are offered will usually depend on your circumstances so could be higher, the same as or lower than the representative APR.
The advertised rate may also only apply to a specific loan amount so search for deals for the amount you actually need to borrow.
Remember to check the lending criteria before you apply to make sure you're eligible. Some loans won’t be available to people who have a history of credit problems although secured and unsecured loans for bad credit and even debt consolidation loans are available.
When you're considering a personal loan, it's natural to feel more comfortable taking out a loan with the bank you have your current account with. It knows you as a customer and the familiarity can make you feel safer.
But although you might get a better deal with your bank, loyalty doesn't always reward you in this way. This is another reason why shopping around and comparing loans, as well as finding out what your bank can offer you, before you apply for one is important.
An important consideration when taking out a personal loan is how long you’ll take to pay it back. This is what's known as the loan term.
The longer the loan term the more you will end up paying in interest overall but a longer loan term also means your monthly repayments will be smaller so more affordable. You should strike a balance between paying off your loan as quickly as possible and having repayments that are manageable.
A fixed interest rate on your personal loan ensures that your monthly payments remain the same throughout the term. This means that even if interest rates rise across the market as a whole the rate on your loan will remain unchanged, which makes it easier to budget and keep on top of your repayments.
Although most unsecured loans available have fixed interest rates, it's always important to read the small print to avoid any nasty surprises.
If you're in need of money quickly it can be tempting to opt for payday loans. These are short-term loans where funds are often transferred to you within 24 hours of applying. They’re also available to those with bad credit.
While these might sound great, you should avoid getting a payday loan at all costs if you can. That's because interest rates on payday loans are extortionately high and can trap you into a cycle of debt. Read more about why you should avoid payday loans.
Depending on how much you want to borrow, you might be better off taking out a credit card that offers interest-free purchases for a period of time instead of a loan. This could be the case if you are only looking to borrow a small amount – £500 to £5,000 for example – as smaller loans often attract the highest rates of interest.
By taking out a 0% on purchases card instead you can borrow the amount you need (providing your credit limit stretches to this) without being charged interest, as long as you pay off the balance before the introductory period is up. This can be much more cost-effective than taking out a personal loan if you only need a small amount.
If you do take out a credit card instead of a loan, follow these tips to make sure you don’t pay interest unnecessarily:
Remember not to use your card for anything other than the amount you need to borrow.
Make sure it’s completely cleared before interest starts being applied to your debt. To make this easier consider setting up a direct debit from your current account to your credit card to make sure a portion of the balance is paid off automatically each month until it’s cleared.
Ensure you make at least the minimum repayment each month until the balance is paid off.
Make sure you get a card with a long enough interest-free period for you to pay the whole amount off in time, otherwise it won’t be a realistic option.
If you would like to have the reassurance of PPI (Payment Protection Insurance) on your loan it's worth considering. PPI protects you if you become unable to repay your loan because of a loss of income by covering your loan repayments.
Before you take out a PPI policy, shop around rather than accepting it as an add-on to your loan and consider whether it’s the right type of protection for you. You might be better off taking out an income protection policy instead, which covers your income rather than a specific debt.