Useful Tips For Personal Loans

Banking and Borrowing

Updated on 16 December 2008 | 0 Comments

Jane Baker writes about how to get the best deal on personal loans.

Despite our best intentions sometimes an unexpected expense will rear its ugly head for which we simply don't have enough savings in reserve. This has happened to me before and it's not a particularly nice feeling when you're under pressure to get credit.

A while back I tried to put my car through its M.O.T but being such an old banger that was going to cost more than it was actually worth! I decided to stop throwing good money after bad and get rid. Now I had no transport and with an important long trip looming I was starting to worry. My only option appeared to be a personal loan to buy a new car and quick.

The first couple of companies I tried turned me down which, as you can imagine, concerned me greatly, but thankfully the third attempt with a well-known lender was successful. Luckily even though I was in a hurry and didn't do nearly as much research as I should, I ended up with reasonable loan but that was pretty much by chance.

The loan offered a fixed interest rate so I'd at least know how much I'd have to outlay each month. And fortunately it was flexible so I could overpay or redeem it early without facing a heavy penalty.

This turned out to be really important because I had asked for the loan to run over five years to keep the repayments low. If it had run for the full term the interest would have racked up significantly but I managed to clear it in three years keeping the overall cost or the TAR down.

When it comes to choosing a loan take a moment to look at the TAR: Total Amount Repayable, and not just the APR (annual percentage rate). This will tell you the entire cost for your credit over the term you select, which is not always apparent from the APR alone. It's essential to compare loans before making a decision. Rates vary dramatically from lender to lender so it really pays to shop around.

These days, a good personal loan seems a little harder to come by. Flexible loans with fixed rates appear less prevalent than they once. But hopefully if you have more time than I did, these types of deal can still be found if you look hard enough.  

What's more personal loans are more costly than they were even just a few months ago with a trend of rising interest rates emerging in the wake of the global credit crunch. Earlier in the year it was possible to get a loan for under 6%, but you won't be able to find such competitive deals now. That said it still makes sense to compare loans to avoid paying over the odds for your credit. Wasting money needlessly really is painful.

If you're only planning to borrow on a short-term basis you could consider a 0% on purchases credit card instead. With the most generous interest-free period now running to fifteen months this is a way to borrow while side-stepping any interest costs. Just make sure you pay off your credit in the period allotted or you could get stung when the card reverts to the higher typical APR.

But for longer-term borrowing than that, a personal loan is probably a good bet. Have a look at our five useful tips before making your choice:

Five useful tips for taking out a personal loan

1.     Borrow the minimum amount you need - the more you borrow the larger your total interest bill will be.

2.     Keep the term of your loan as short as possible but make sure you can still comfortably afford the monthly repayments.

3.     Try to find a fixed rate loan if you can. If a variable rate loan is your only option make sure you budget for the possibility of higher repayments in the future.

4.     Always compare the Total Amount Repayable (TAR) rather than the Annual Percentage Rate (APR). The TAR will give you an accurate picture of the total cost of your loan.

5.     Choose a flexible loan if you can. This will enable you to make overpayments or redeem your loan early. You should aim to clear the debt as quickly as possible. Always check there are no penalties for doing so.

Visit our loans centre and look for the best unsecured personal loan for you.

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