Forewarned is forearmed, so before you start shopping around for a personal loan, be sure to read these tips.
Although I was never a Boy Scout, I think that the Scout Association has a terrific motto: "Be prepared".
Indeed, I think that this maxim applies throughout life, because regardless of what your next steps will be, you need to be prepared to have any chance of facing the future with confidence. This applies even more so when you're shopping around for financial products, because there's a minefield out there!
Take, for example, personal loans. Each year, around 6½ million people arrange a personal loan, borrowing billions of pounds in the process. However, I'm willing to bet that only a tiny fraction of these borrowers actually end up with the best loan to suit their needs. Indeed, millions of borrowers simply stroll along to their local bank branch and sign on the dotted line. To me, this is one of the greatest crimes against your finances that you can commit, because it can waste thousands of pounds of your hard-earned cash!
In Great Deals For Borrowers, I listed a dozen tips aimed at helping borrowers to find their perfect personal loan. Of these twelve tips, the most important is probably "ignore the APR, but check the TAR", which means "ignore the advertised interest rate; instead, check how much the total amount repayable is".
The TAR shows the total cost of a loan, including your advance (how much you borrow), plus any interest and fees payable. However, it doesn't include any charges for rapid delivery of the cash, which can be surprisingly steep, as I warned in The Hidden Costs Of Getting Credit. Hence, the TAR is the figure to check when you're comparing loans.
To save time, I've done the legwork for you: here are the cheapest loans to borrow £5,000 over three years without the dreaded payment protection insurance (PPI):
Best Buy personal loans (£5,000 over 36 months without PPI)
Lender | Total amount | Typical |
|---|---|---|
| Moneyback Bank ** | 5,435.28 | 5.6 |
Northern Rock * ** | 5,439.96 | 5.7 |
Abbey ** | 5,447.52 | 5.8 |
| Barclaycard ** | 5,459.04 | 5.9 |
Direct Line | 5,470.56 | 6.1 |
| 5,486.04 | 6.3 | |
Lombard Direct | 5,493.96 | 6.4 |
The AA ** | 5,499.00 | 5.8 |
Source: The Motley Fool's loans wizard; powered by independent researcher Moneyfacts
* £35 fee for same-day funds by CHAPS
** rate only available online
That's the Best Buys out of the way; now let's take a look at the other end of the spectrum: the Don't Buys! These loans include payment protection insurance, which massively increases the TAR, yet leaves the APR unchanged. Bad news, eh?
Don't Buy personal loans (£5,000 over 36 months with PPI)
Lender | Total amount | Typical |
|---|---|---|
Secure Trust Bank | 7,518.60 | 19.5 |
Halifax/Bank of Scotland | 7,305.48 | 9.2 |
| Norwich Union | 7,190.28 | 9.9 |
Norwich & Peterborough BS | 7,173.68 | 8.9 |
RAC Financial Services | 7,087.68 | 8.9 |
These five loans combine unattractive interest rates with massively overpriced premiums for PPI, making them the dogs of our survey. Avoid at all costs -- unless you want to throw away a couple of grand, of course!
More: Find top credit cards, personal loans, mortgages and savings accounts today!
Disclosure: Cliff owns shares in HBOS, parent company of Halifax and Bank of Scotland.