Looking for a personal loan? Here's how to choose the right one for you.
Did you know that there are probably around 400 to 500 different personal loans on the market at any one time ? Where on earth do you start?
The important thing is to shop around but what follows is a list of fundamental 'Dos' and 'Don'ts' that should point you in the right direction.
Do:
- Be wary of 'typical' APRs. This means that the interest rate you pay depends on your personal financial circumstances. Although two-thirds of borrowers must be given the 'headline' typical rate, you might not qualify if your credit history isn't spotless or you don't fit the lender's ideal customer profile.
- Compare the cost of loans by looking at the Total Amount Repayable (TAR) as well as the Annual Percentage Rate. This shows the total amount in cash that you're expected to repay, including all monthly repayments, fees and charges. Generally speaking, the lower TAR, the better the deal.
- Opt for a fixed interest rate rather than a variable one. This means that your monthly repayments stay fixed throughout the life of the loan, which not only helps with budgeting but also ensures you don't get any unpleasant surprises.
- Check out the penalties for early repayment. Around seven out of ten personal loans are paid off early, so look for a flexible loan that allows overpayments and watch out for loans that charge hefty fines for early settlement.
Don't:
- Get a secured loan. These are like mortgages and mean that if you have trouble making repayments, you can lose the roof over your head. An unsecured personal loan shouldn't put your home at risk.
- Go to your local bank branch for a personal loan. High-street banks don't usually feature that often in the Best Buy tables for personal loans, so make sure you shop around and compare costs before choosing one.
- Automatically sign up for the expensive Payment Protection Insurance (PPI) that'll invariably be offered to you. Although it may be reassuring to think that it'll cover your monthly repayments if you lose your job or can't work because of accident or ill health, or pay off the debt if you drop dead, it's massively overpriced. If you want some form of loan protection, buy a stand-alone policy from companies such as Paymentcare or Burgesses or even the Post Office. It'll be much cheaper.
- Fall for loans with gimmicks such as repayment holidays and 'buy now, pay later' deals. Ultimately, you'll pay for such 'benefits' so opt for a simple and straightforward loan instead. Complicated products are often more expensive.
One final point is that if you're using a personal loan to consolidate various debts, don't forget you will simply have switched your debts to a new lender. The total debt will still exist and it'll only be paid off when you actually finish paying off the loan so don't be fooled by the notion that you've 'cleared' your credit card!