Loans: Choosing The Right Loan

Although personal loans are, at first glance, relatively simple products, the devil's in the detail! Then again, armed with the following advice, you should be confident of finding a cheap loan that's right up your street.

The key thing to remember is that the more you borrow, the more interest you pay, so borrow the absolute minimum that you need. Also, the more time you take to repay your loan, the larger your interest bill, so try to keep the term of your loan as short as possible, while keeping your monthly repayments affordable.

Most personal loans charge fixed interest rates, which means that your monthly repayments won't change throughout the life of your loan. If you choose a loan that charges a variable rate, make sure that you budget for higher repayments, just in case your rate rises in future.

Be wary of 'APRs' (Annual Percentage Rates), because these are an imperfect measure of the cost of borrowing. As lenders have a few tricks to artificially reduce APRs, take these figures with a pinch of salt! For example, a short payment holiday at the start the loan can reduce the stated APR but mean you end up paying back more than a loan that has a higher APR.

Also make sure you understand what a 'typical' APR is, because you may not qualify for this headline rate. Instead you may be quoted an individual interest rate based on your personal circumstances. Although two-thirds of borrowers (67%) must be given the advertised typical rate, you might not make the grade if you have a poor credit history is less than perfect, or you don't fit a lender's ideal customer profile.

The best way to compare personal loans is to look at the 'Total Amount Repayable' (TAR). This adds up every penny that you're expected to repay, including all monthly repayments, fees and charges. Therefore, the lower the TAR, the better the deal, all other things being equal. So, take more notice of the TAR than the APR!

Next article: Applying For A Loan

Published on November 17, 2006