MONEY COMMENT
Top Ten Loan Tips

By Cliff D'Arcy
January 27, 2003

Lenders bombard us relentlessly with advertising in January, urging us to take out unsecured personal loans, as they know many of us have over-spent on Christmas and have resolved to improve our finances.

This leads to a surge in consolidation loans (those taken out to clear other debts). These can be useful but only if you're replacing pricier debts. Here are some tips to help you borrow with confidence:

1. Decide how much you can afford: add up all your monthly expenses and subtract this from your income to calculate how much you can spare. If this is £160 a month, think Ford Ka, not Porsche Boxster! Don't overstretch yourself by borrowing too much: there are too many debt collectors currently "helping" borrowers with their repayments.

2. Consider the alternatives: you could borrow cheaply against your home. Interest rates under 5% are attractive but you should only borrow against your home if you are certain you can meet the higher repayments.

3. Choose your time period for repayment: if you can spare £160 a month over three years, you're looking at repayments totalling £5,760 (around £5,000 plus interest).

4. No-one aims to borrow at extortionate rates, but many lenders are waiting to fleece unwary borrowers. Interest rates on personal loans vary from under 7% to over 40%, so the key rule is shop around. For a £5,000 loan over three years, the "total charge for credit" ranges from under £540 to almost £2,000 – four times as much! Which do you want to add to your loan?

5. Be wary when comparing APRs (Annual Percentage Rates, a way of measuring interest charges). The theory goes: the lower the APR, the lower your interest bill. However, they can be manipulated and are too complicated - I say this as a mathematician!

6. Instead of APRs, compare TARs (Total Amounts Repayable). These are incredibly useful, as they show the "bottom line" – the total the lender expects you to repay, right down to the last penny. Go for the loan with the lowest TAR over your timescale, which has to be the best deal.

7. Beware of "Payment Protection Insurance (PPI)". These are optional insurance policies that lenders will push very hard, even by arranging "protected" loans without your prior approval. Premiums are added to your loan and you usually pay interest on them. PPI typically pays your monthly repayments for a specified period if you are unable to work because of accident, sickness or unemployment, and settles your loan if you die.

Lenders make billions of pounds each year from PPI commissions, but rarely pay out more than about 20% of the money collected to claimants. This means that PPI is about five times as expensive as it should be! PPI can increase the cost of your loan by anything from 5% to 25%. In the above example, this could amount to £1,500 - why pay it, when your lender makes a profit of £1,200?

8. Don't be fooled by gimmicks such as payment holidays or repayment breaks, as you end up paying for them somewhere. Don't take loans with arrangement fees, and watch out for early repayment charges – some lenders penalise you heavily if you settle your loan early.

9. SHOP AROUND. Don't be loyal: big banks frequently offer faithful customers terrible deals, so you could end up paying the price for your allegiance. Take a look at the mailshots that land on your doormat, check Teletext (try page 259 on BBC2 and page 497 on Channel 4) and the Internet.

10. Banking is a bazaar, so you should haggle - take your best deal, not your first deal. After all, ten minutes' research could easily save you over £1,000, so go to your bank last, not first, and challenge them to beat your best deal.

More: The Fool's Personal Loan Centre