Loan rates are falling
Since the start of the year, the representative annual percentage rates (APRs) on the best deals have been falling and falling, which is great news for those looking for a low cost loan.
Borrowers looking for between £7,500 and £14,999 can apply for the cheapest rates available since November 2008.
For example, if you wanted £7,500 over three years, Sainsbury’s Finance has a representative APR of just 7.1% - much less than the average rate this time last year of 8.33%. Monthly payments at this rate would cost £231.16 a month, so the total charge for credit would be £822.
Alliance & Leicester has a representative APR of 7.2%. If you borrowed £7,500 over three years at that rate, you’d pay £231.48 a month, with a total charge for credit of £833.
It pays to check your credit score
Not every lender will agree to let you take out a loan, and some may offer you a higher APR than the representative figure because they see you as riskier.
So, when you’re working out if you can afford a loan, get hold of your credit file so that you can have a realistic idea of whether you’ll be offered the headline rate.
Don’t apply for lots of deals
If you’re not sure which lender will offer you the best APR, it can be tempting to fire off loads of applications at the same time.
This is a really bad idea as most applications show up on your credit history, which can worry lenders and mean you’re rejected for loans you might have otherwise qualified for.
However, Nationwide will only run a soft search of your credit file before making you an offer.
That means that you can see what rate you’d be offered without it hurting your credit score.
If you want to borrow £7,500 over three years, it offers a representative APR of 7.3% - only just behind the market-leaders, and this deal is available exclusively through moneysupermarket.com.
At that rate, you’d pay £231.81 a month, meaning a total charge for credit of £845. That’s just £23 more than the market-leading Sainsbury’s loan.
The best rates aren’t always available direct
It’s not always cheaper to approach a lender directly for a loan, in fact, sometimes it can be more expensive.
For example, the Nationwide rate mentioned above is not available through the bank’s website.
Likewise, the Alliance & Leicester 7.2% rate is only available through price comparison websites and not to anyone who applies direct.
The same is true for Santander personal loans. The bank has a representative APR of 7.3% on borrowing of £7,500 over three years, meaning monthly repayments of £231.81 and a total charge of £845, but this deal is again not available direct.
Sometimes credit cards are better
If you want to borrow a smaller amount, perhaps £3,000 or less, it may well be cheaper to use a market-leading credit card than a loan – especially as rates on personal loans are much higher for smaller amounts of borrowing.
Some credit cards offer interest-free periods on new purchases, meaning you could pay nothing for your borrowing – so long as you clear the debt within the 0% introductory period.
For example, the Tesco Clubcard Credit Card gives new customers 13 months at 0% on purchases. It also offers nine months interest-free on balance transfers, for a 2.9% fee.
But, if you don’t clear your balance within the introductory period, you’ll move to a representative APR of 16.9% variable, so you may be better off sticking with a loan.
Loans can be secured or unsecured
There are two kinds of loan and it’s important to be clear about the kind of deal you’re applying for.
Unsecured loans tend to be for borrowers requiring a relatively small amount of cash – not more than £25,000. However, a secured loan means that the debt is held against your property, which is why these are often referred to as ‘homeowner loans’.
Remember that if you aren’t able to keep up with payments on a secured loan, then the lender is within their rights to come after your home to get its money back.
It can cost less to borrow more
Because rates are lower if you want to borrow £7,500 or more, it can actually work out cheaper to borrow slightly more if you’re looking for around £7,000.
For example, if you want to borrow £7,500 over five years, then one of the cheapest available rates is 7.2%, costing you £1,405 over the term.
However, if you borrowed £7,000 over five years, the best rate you’d be offered is 8.5%, meaning a total cost of £1,554 over the term. You may as well take the extra £500 and put it towards your repayments.
You may not get the rate you see
If you’re accepted by a lender, you won’t necessarily be offered the representative APR being advertised.
Lenders have to offer that rate to at least 51% of their customers, meaning you could be offered a much higher rate.
Consolidation could save you cash
The more you borrow, the lower the rate. So, if you have store and credit card debt, plus a small loan then it’s worth considering consolidating that borrowing in order to a lower rate overall.
You could potentially save hundreds of pounds in interest, plus it’s easier to keep on top of your money.
Early repayments can cost
If you’re planning to save alongside your repayments in order to clear the debt earlier than planned, be aware that most loans levy an early repayment charge.
This is usually a few months’ worth of interest, but you should certainly remember this when you consider the cost of a loan.
You may decide to borrow over a shorter term instead.
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