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Here's a modern proverb for you: "Christmas spending sprees lead to loans in January!" Thanks to people spending wildly during the festive season, January is a bumper month for personal loan providers. Indeed, hundreds of thousands of people take out loans in January, with many doing so to keep a New Year's resolution to sort out or simplify their finances. Others borrow to pay for a car, holiday, home improvements, wedding -- or even a post-Xmas divorce! Sadly, the majority of these borrowers make elementary mistakes which cost them a small fortune. Get it right and you can pick up a bargain-basement loan, but get it wrong and you could end up paying thousands of pounds too much. Here is a quintet of tips to help you to find your perfect personal loan: 1. Don't put your home on the line A mortgage is a secured debt, which means that your home is at risk if you fail to keep up with your repayments. On the other hand, credit cards, personal loans and overdrafts are unsecured debts, so they aren't connected to your property. As I warned here, despite the promise of "affordable monthly repayments", only crazy or desperate people roll up their unsecured debts and turn them into a second mortgage or secured loan. To be honest, if you already have borrowing or overspending problems, why put your home at risk, too? 2. Don't be tempted to over-borrow The first law of borrowing is: "The more you borrow, the more you'll pay back." Hence, it makes sense to borrow as little as you can -- and to pay back your debt as quickly as possible, making sure that you can comfortably afford your monthly repayments. If you do borrow a little more on top to pay a few treats, understand that this could come back to haunt you in the long run! 3. Use this easy way to compare loans As I explained in Don't Be Fooled By Loan Rates, it's not a good idea to use APRs (Annual Percentage Rates) to compare loans, as they are easily manipulated. It's better to use the Total Amount Repayable (TAR) to weigh up loans, as it includes all interest and lending fees. For example, according to Moneyfacts, a loan of £5,000 over three years without payment protection insurance can have a TAR as low as £5,440, or as high as £6,503. That's a difference of more than a grand - ouch! 4. Avoid payment protection insurance (PPI) Payment protection insurance pays your monthly repayments if you can't work due to accident, sickness or unemployment, and pays off your loan if you die. Sadly, these policies are packed with small print, so making a successful claim can be an uphill struggle. What's more, this (optional) protection is unbelievably expensive, thanks to lenders pocketing commissions of up to four-fifths (80%) of the entire premium. For example, for an unprotected loan of £5,000 over three years, Lombard Direct charges a TAR of £5,493.60 (6.4% typical APR), which means an interest bill of just short of £494. Adding payment protection insurance hikes the TAR to £6,256.08 (6.4% typical APR), which is a whopping £762.48 on top. Is this peace of mind worth an extra £21 a month? As someone who worked in the PPI market for eleven years, I have to tell you that the answer is a firm "no". Instead, put the money you save from not buying PPI into an emergency fund in a high-interest savings account! 5. Be sure to shop around Around seven out of ten borrowers make the biggest mistake possible: going straight to their bank for a personal loan. That's because the high street is a terrible place to find a loan, thanks to high interest rates and pricey PPI. The simplest and easiest way to find Best Buy loans is to look online. For example, in our Loans centre, you'll find great deals from leading lenders such as Cahoot, The AA and Intelligent Finance, plus a great rate from Nationwide BS which is given to all successful applicants, not just those with the highest credit ratings. I hope that these tips help you to be a better borrower in 2006 and beyond! More: Check out the tasty TARs in our Loans centre | Open a superior savings account today!
