You'd be mad to pick a personal loan without reading this guide first!
Millions of us take out a personal loan each year, usually to consolidate other debts or pay for a car, wedding, holiday, home improvements, etc. However, how many of us actually take the time to find the perfect personal loan for our needs? Here is some advice to help you to find your ideal loan:
1. Ignore secured loans!
Although there all different types of loan, essentially, they fall into two categories: secured and unsecured. As with mortgages, secured loans are secured against your property, which means that your home is at risk if you fall to keep up with your repayments. Sadly, umpteen borrowers lost their homes during the recession of the early Nineties. Hence, I wouldn't recommend taking out secured loans for anything except major home improvements. They may be a cheap way of borrowing, but this benefit can come at a high price!
2. Borrow as little as you can!
The more that you borrow, the larger your interest bill will be. Also, the longer that you take to repay your debt, the more interest you'll pay. Hence, borrow as little as you can over the shortest appropriate timescale - but make sure that you can comfortably afford the monthly repayments, of course! Don't listen to the adverts and borrow 'a little bit extra' for a few luxuries, because they'll end up costing you much more in the long run!
3. Ignore APRs!
Annual Percentage Rates, shortened to APRs, are supposed to provide an accurate benchmark to compare loans. However, they are by no means a perfect measure of the true cost of loans. For example, payment holidays and 'typical APRs' can disguise the true cost of borrowing.
When I compare loans, I ignore the APR quoted and, instead, look at the TAR (Total Amount Repayable). This shows you how much you will repay, right down to the last penny, and includes your advance, interest and all other charges. The cheapest loan will be the one with the lowest TAR, all other things being equal.
4. Ignore payment protection insurance (PPI)!
Don't bother buying payment protection insurance, which pays your monthly repayments if you can't work due to accident, sickness or unemployment, and pays off your loan if you die. This cover is unbelievably expensive, even though only a tiny minority of borrowers successfully receive benefits from these policies. PPI can add increase the cost of a loan by to a third, and the premium is usually larger than your interest bill.
Rather than buying PPI, why not put aside the premiums that you've saved in a high-interest savings account? That way, if you do fall sick or lose your job, you'll have your own personal insurance fund to fall back on. However, if you absolutely must have extra peace of mind, don't buy PPI from a lender. Instead, find a cheap stand-alone policy; an online search will throw up loads of providers.
5. Don't borrow from your bank!
One thing's for certain: you won't find a great loan in your local branch. Indeed, the high street is probably the worst place to find a personal loan, because most big banks feature in the "Don't Buy" tables! Smart borrowers look for Best Buy loans online, because that's where the lowest rates can be found.
Our new loan centre has many of the cheapest deals on the market. The cheapest loan available right now is from Moneyback Bank, which is part of Alliance & Leicester. This charges just 5.5% typical APR for loans between £1,000 and £25,000.
I hope that this article has helped you to become a better borrower!
More: Check out the lovely loans in our Personal Loans centre | Get a better savings account today!
