If you're in the market for a personal loan, you might think it's all about the rate. However, there are a number of other factors you should take into account before signing on the dotted line.
When taking out a loan, the first thing that most of us consider is of course the interest rate. After all, that's the factor that - on the face of it - will have the biggest bearing on how much the loan actually costs in the long run.
However, picking a loan is not just about finding the lowest possible rate. There are plenty of other non-rate features to consider, which in some cases can be as important as the interest rate you pay.
Here’s what you need to know:
Your credit report
One thing to consider when applying for a personal loan is whether the lender has a facility where an applicant can get an in-principle quote without leaving a 'credit-application search' on their credit report.
Normally prospective borrowers have to go through the application process to see what personal loan rate they will be offered. This means lenders perform a 'hard search on the applicant's credit record to get all the information needed to make a decision.
This kind of search leaves what’s called a 'footprint' on the credit record. This footprint can be seen by other lenders who search your record later.
Problems can occur when you apply to several lenders for a quote or credit in a short period of time. This leaves a number of footprints on your record, which in turn could deter lenders from offering you loans at a decent rate, if at all. After all, if you're applying for a lot of credit in a short space of time, it gives the impression that your financial situation may be a little unstable.
[SPOTLIGHT]However, not all lenders perform hard searches on your credit record. Nationwide, Zopa and Ratesetter for example, only perform a “soft quote” which doesn’t leave a mark on your credit record. This means you can find out what APR these organisations would offer you without worrying that doing so will deter lenders from lending to you in the future.
A soft quote will only appear on your credit report if you accept the quote and continue with the application.
Does the loan have a fixed or variable interest rate?
Most unsecured loans have a fixed interest rate, which gives borrowers certainty about monthly repayments.
However, some loans have variable interest rates which means payments can go up or down. Make sure you know exactly what sort of rate the lender is offering before you sign up.
Fees and charges
Some unsecured loans charge an arrangement fee, which can be anything up to £200. Obviously this fee can make a big difference to the amount the loan costs you overall so it’s important to take this into consideration.
Another thing to double-check is whether there will be a charge if you repay the loan early and, if so, how much will it be. According to independent financial research company Defaqto, 42% of loans have an early repayment charge of 30 days or one months' interest, while 36% of loans have an early repayment charge of between 58 days and two months' interest.
Some unsecured loans also offer a deferred start which may or may not be interest-free. If you choose to defer repayments, check if this will affect the amount you repay overall. A handful of loans also have the option of a repayment holiday.
Rates
According to Defaqto, average interest rates for unsecured loans of £5,000 have increased over the past twelve months whereas the average rate for a loan of £10,000 has decreased.
If you’re borrowing £5,000 over three years the average rate is now 13.2% compared to 12.6% a year ago. However, if you’re borrowing £10,000 or more over five years, the average rate has reduced from 9.8% to 9.2%.
Cheaper rates are available if you opt for a secured loan, rather than an unsecured loan. To qualify for a secured loan you’ll normally need to be a homeowner with equity in your property.
However, bear in mind that if you default on a secured loan your home could be a risk of repossession.
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