We look five plus points and five negatives of taking out a personal loan.
Personal loans are most often used to buy cars, holidays or home improvements, or for paying off other debts. Here are ten important things to learn before you choose a loan.
Five pros
- You can borrow up to £25,000 and pay it back over anything up to ten years. Generally speaking, the more you borrow, the lower the annual interest rate that you'll pay.
- Currently, interest rates on personal loans are the lowest that they've ever been. If you're borrowing over £5,000, you can pay an annual percentage rate below as 6% APR. Borrowing £5,000 over three years could cost you as little as £430 in interest.
- Most personal loans charge fixed interest rates. This means that your monthly repayments stay fixed throughout the life of your loan, which helps with budgeting.
- Unlike a mortgage, an unsecured personal loan isn't secured against your home, which means that your home isn't at risk if you have trouble making your repayments.
- To compare the cost of loans, look at the Total Amount Repayable (TAR). This shows the total amount 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.
Five cons
- It's a bad idea to pop along to your local bank branch for a personal loan. Few high-street banks feature in the Best Buy tables for personal loans, so shop around online before signing on the dotted line.
- Around seven out of ten personal loans are paid off early, so watch out for loans that include hefty fines for early settlement. Some lenders charge up to two months' extra interest as a penalty for settling early.
- Watch out for 'typical' APRs, where the interest rate you pay depends on your personal financial circumstances. Although two-thirds of borrowers must be given the 'headline' typical rate, you might not qualify if your credit history isn't spotless or you don't fit the lender's ideal customer profile.
- Beware of expensive payment protection insurance (PPI), which meets your monthly repayments if you cannot work due to accident, sickness or unemployment, and pays off your loan if you die. This is hugely overpriced and can add £1,000 to the cost of a £5,000 loan. Banks make billions from selling this cover, so only take it out if you absolutely must have this (costly) peace of mind. Most borrowers should give protected loans the elbow!
- Look out for gimmicks, such as repayment holidays, 'buy now, pay later' deals and 'free' additional benefits. These frills just inflate the cost of your loan, so go for the cheapest bog-standard loan instead.
So, on balance, credit cards probably have the edge over personal loans, thanks to their flexibility and those juicy 0% deals!
> Check out the latest deals for low-rate credit cards and personal loans.
