My £7000 Question
|
This article was first sent to Fools as part of our 'The Good, The Bad and The Ugly' email series.
When I finally escaped student life, it wasn't long before sorting out my finances shifted to the top of my priority list.
Gone were the days of irresponsible spending and thinking of my overdraft as ‘free money'. One month into my time here, I've done the obligatory credit card balance transfer and started paying down my 0% student overdraft.
But what of my £7000 Career Development Loan (CDL)?
Best Laid Plans...
When I first borrowed from the Co-Op Bank to fund my MA, my idea was to use my CDL during study, then apply for a more competitive personal loan after graduation.
Now the big day has passed, I'm being charged around 13% on my CDL -- definitely an ugly rate of interest!
This is the point at which I planned to take out a low-cost loan, pay off my CDL early and therefore save a significant amount over the life of the debt.
However, when I master-minded these moves in summer 2006, I wasn't banking (excuse the pun) on the credit crunch.
The Changing Loan Landscape
Thanks to the crunch, it's now possible that I -- like many others -- might struggle to get a personal loan at a cheap rate.
In the past two weeks alone, Barclaycard, Lombard Direct, The AA, NatWest and Tesco Personal Finance have all increased selected loan rates. Since the beginning of 2008, more than half of lenders offering personal loans have made changes to their products.
At the same time, lenders have revised how they assess applications for credit and how they decide interest rates.
That means there's still a good chance that a bank will be willing to lend to you -- but at a higher rate of interest than you've applied for. Lenders now tie their best rates to stringent credit history criteria, so that only around two thirds of applicants will get the ‘typical' deal.
Overall, the situation is pretty bad news for borrowers. It means that there is increased risk when we apply for credit, as even a product that looks good can turn out to be ugly.
So -- I suppose I now face the £7000 question. How should I go about making my CDL debt cheaper?
The Art Of Second Guessing
Before you apply for any personal loan, it's a good idea to try and predict what a bank will make of you.
No, I'm not suggesting a premium-rate call to your local clairvoyant.
I am suggesting you take a look at your credit report before trying for a loan.
As long as your credit history looks pretty spotless, it could still be worth applying for a market-leading deal.
Here are three of the best I found on loans of £10,000 repayable over 5 years:
Provider
|
APR
|
Monthly Repayment
|
Total Repayable
|
Features/Fees
|
|---|
YourPersonalLoan.co.uk
|
6.9%
|
£196.56
|
£11,793.43
|
One month interest fee for early repayment.
|
Moneyback Bank |
6.9%
|
£196.73
|
£11,803.80
|
One month interest fee for early repayment.
|
Tesco Personal Finance
|
7.4%
|
£198.58
|
£11,915.00
|
One month interest fee for early repayment, optional two month payment break.
|
If you apply for a personal loan through The Motley Fool Loans Centre, you can get an idea of how banks will rate you - plus a tailored list of loans that it might be appropriate for you to apply for.
To optimise your search in this way, all you need to do is answer eight simple questions. The resulting ‘rough assessment' of your credit rating should make the personal loans minefield that bit more navigable.
For those of us whose histories aren't quite perfect, I'd recommend applying for a loan whose rate is less competitive. Here are three that you might consider (again, for a loan of £10,000 over 5 years):
Provider
|
APR
|
Monthly Repayment
|
Total Repayable
|
Features/Fees
|
|---|
Alliance & Leicester |
7.7%
|
£200.28
|
£12,016.80
|
One month fee for early repayment.
|
The Co-Operative Bank
|
7.9%
|
£200.99
|
£12,059.19
|
One month fee for early repayment. Four month repayment holiday available for existing customers.
|
M&S |
8.9%
|
£208.37
|
£12,502.20
|
One month fee for early repayment.
|
Not An Exact Science
Unfortunately, even an estimate of your likely popularity with lenders can't guarantee you the rate you apply for. In the increasingly complex world of personal loans, nothing is certain.
However, targeting your loan application carefully does give you the best chance of success -- and if you're in a position like mine, your new loan rate doesn't necessarily have to be market-beating in order to offer you savings.
If, for example, you're currently paying off debts at an interest rate of 15%, even a ‘mid-table' loan with a rate of around 8% will slash the cost of your borrowing by almost half!
As for me? After some careful thought, I've decided to play it safe and give Alliance & Leicester a try.
Second guessing may not promise the perfect personal loan, but it certainly beats falling foul of an unexpectedly ugly one!
Visit The Motley Fool Loans Centre for more information on borrowing and some great loan deals!
