Before you shop around for a personal loan, read this guide to getting more loan for less money!
Although I haven't had a personal loan for around six years, at one point in the Nineties, I had three of the blasted things! Also, before joining the Fool, I worked with or for many of the UK's leading lenders, so I know this market well. So, without further ado, here are my tips on finding your perfect personal loan:
1. Do you really need a loan?
Currently, British borrowers owe a whopping £131 billion on personal loans, car loans and overdrafts, plus a further £55 billion on credit and store cards, and £895 billion in home loans. So, our total debt is £1,081 billion higher than at any point in history. Crikey!
Therefore, the first question that you should ask yourself is: "Do I need to borrow this money at all?" Perhaps you could fund that new car, holiday, kitchen extension, wedding or divorce from your savings? Alternatively, I often fund one-off spending by borrowing money on a series of 0% credit cards, flipping my debt from one to the next. If your credit rating is up to scratch, you could do the same, and avoid paying any interest at all!
Get a superior savings account here and learn more about 0% cards inBe A Winner in the 0% Game!
2. Are you rolling up other debts?
Many people are lured into taking out a personal loan with the promise of "clearing your debts and having one easy, affordable monthly repayment". This is a complete illusion, as you're not clearing your debt, you're simply parcelling it up and handing it to a different lender! Of course, getting a personal loan may be the answer if you can replace expensive debts with a low-cost loan. However, many people would be better off killing their debts with a snowball.
Grab a free "Getting Out of Debt" handbook here.
3. Ten rules of the personal loan game
If you've decided that a personal loan is indeed your best option, here's how to find the best deals:
- A mortgage is secured against your home, which means that the roof over your head is at risk if you fall behind on your repayments. However, an unsecured personal loan isn't secured against your home, so you're unlikely to lose your house if you can't keep up your loan repayments (unless you go bankrupt, perhaps).
- 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 goes up further down the line.
- Don't be fooled by APRs (Annual Percentage Rates), because they are an imperfect measure of the cost of borrowing. As I explained in When Interest Rates Lie, lenders have learned to artificially reduce APRs, so take them with a pinch of salt!
- Also, beware of 'typical' APRs, where you are quote an individual interest rate based on your personal financial circumstances. Although two-thirds of borrowers (67%) must be given the advertised typical rate, you might not qualify for this if your credit history is less than perfect, or you don't fit a lender's ideal customer profile.
- Let's say that you're borrowing £5,000 over three years. Your interest bill could be less than £500 - indeed, I found more than ten Best Buy lenders in this category. On the other hand, it could be between £1,000 and £3,000 and I found loads of lenders in this grim group. Thus, it pays handsomely to shop around! Also, gimmicks such as repayment holidays and other 'free' add-ons will increase your interest bill, so ignore these bells and whistles - opt for a plain vanilla loan, instead!
- 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, ignore APRs and check TARs!
- Don't wander down to your local bank branch and sign up on the spot, because you won't see any high-street banks in the Best Buy tables, only in the "Don't Buy" tables! Shrewd borrowers shop around online, because that's where the lowest rates are to be found.
- Steer clear of rip-off personal loan protection (PLP), which pays your monthly repayments if you can't work thanks to accident, sickness or unemployment, or pays off your loan if you die. PLP can add between £500 to £1,500 to the cost of a £5,000 loan over three years. Lenders make billions from selling this cover, because it's about five times as costly as it could be, as I explained in Loan Protection Comes At A Price. If you really must have the peace of mind that PLP offers, don't buy this cover from your lender - shop around for a stand-alone policy, instead.
- Finally, watch out for early settlement penalties, because around seven in ten personal loans (70%) are paid off early. Some lenders charge no early repayment penalties, but the law allows lenders to charge up to two months' extra interest if you retire your loan early.
That's it from me. I hope that these tips and tricks will help you to become a brilliant borrower!
More: Check out our latest deals for 0% credit cards, low-cost personal loans and high-interest savings accounts.
