How To Find A Cheap Personal Loan

Cliff D'Arcy explains how he makes sure he gets a cheap deal at a competitive price.

When you need to shell out for a major purchase, you have three options:

•    Dip into your existing savings to cover the cost;
•    If you don't have enough squirreled away, then save up and bide your time; or
•    Borrow the money now.

If saving isn't your thing, then you'll probably plump for option 3: borrow the money, either from individuals (family members?) or from an organisation. If you borrow on the high street, then your options are, broadly speaking, to borrow using an overdraft, credit card or personal loan. Overdrafts and credit cards generally charge higher rates of interest than personal loans, which explains why over six million people take out an unsecured personal loan each year.

(I like to think that I know a little more about personal loans than most people. Indeed, I relied on them so much in the past that I had three on the go at the same time!)

Anyway, if you are planning on buying a car or other expensive item, or need to pay for home improvements, a holiday, wedding or divorce, then a personal loan may be on the menu. If you do go down this route, then I'd ask you to ignore four things and pay close attention to two things:

FOUR THINGS TO IGNORE:

1.    Secured loans

A secured loan is `secured' against your home. In other words, if you fail to keep up the monthly repayments, then your home is at risk. Given that it's not worth losing the roof over your head to pay for a nice holiday or other outlay, then I'd steer clear of secured loans if I were you.

2.    The interest rate

All loan advertisements must quote the annual percentage rate (APR), which is supposed to allow you to compare interest rates. Alas, APRs can be manipulated, so they are sometimes misleading. Hence, I use a different benchmark to compare loans, as you'll learn if you read on...

3.    The monthly repayments

Again, I wouldn't place too much store by the monthly repayments which you're quoted. What's important is to compare your total outlay on a loan, including interest and any fees. So, use the monthly repayments as a guideline to affordability, but nothing more.

4.    Payment protection insurance (PPI)

Payment protection insurance is optional cover which meets your monthly repayments (normally for up to a year) if you are unable to work because of an accident, sickness or unemployment. It also pays off your loan if you die. However, PPI is hideously expensive -- it can add up to two-fifths (40%) to the cost of a loan -- so avoid it at all costs!

TWO THINGS TO WATCH:

The total amount repayable (TAR)

The honest yardstick with which to compare personal loans is the `total charge for credit', also known as the total amount repayable. The TAR clearly displays the total which you will pay back, including all interest and compulsory fees. Use it wisely and you could save thousands on your next loan.

Any fees and penalties

Before you sign on the dotted line, be sure to check to see if there are any additional fees to watch out for. For example, a number of lenders charge a fee of £25 to £35 for same-day delivery of the loan advance into your bank account. However, if your loan isn't urgent, then I'd dodge the fee and wait three to five days for the money to arrive via BACS credit.

Finally, do check to see if there is an early-exit penalty for paying off your loan early, known as an `early redemption charge'. As around seven in ten loans are paid off early, it pays to check this charge before it's too late.

For more information, and to search for Best Buys, visit The Fool's personal loan centre. Over and out!