Three steps to a low-cost loan

Before you start looking for a personal loan, read these three tips to lower your monthly repayments.

In my 22 years of working in financial services, I've come up with a number of useful financial rules of thumb. For example, my Golden Rule of Borrowing is: "Keep your interest bill to a minimum by borrowing as little as you can for as short a time as possible."

Likewise, it's important to look out for additional fees and charges when shopping around for personal loans, mortgages, credit cards and so on. So, never ignore the small print, because the devil's in the detail, especially when you're borrowing a large sum.

Find the perfect personal loan

Of course, it goes without saying that you should never borrow more than you can comfortably afford to repay. Although it is difficult for the lender of an unsecured personal loan to repossess your home, failing to keep up with your monthly repayments could still have serious consequences. You could get a nasty black mark on your credit rating and even face court action or bankruptcy.

Thus, it makes perfect sense to keep your monthly repayments as low as possible, to ensure they don't put a squeeze on your household budget. Here are three ways to help lower your loan repayments:

1.    Check the TAR, not the APR

Every loan quotation must display the Annual Percentage Rate (APR), which gives you an idea of the yearly borrowing cost. However, APRs are not a perfect benchmark, because they can be manipulated. For example, an 'initial repayment holiday' of, say, three months increases the time due before your first repayment is collected. While this brings down the APR, it bumps up your total interest bill.

So, by all means check the APR, but focus your attention on the TAR, or Total Amount Repayable. This is the most reliable measure of the relative cost of a personal loan, because it shows the 'total cost of credit'. Thus, the TAR tots up your advance (how much you've borrowed), your interest bill, plus any compulsory fees.

2.    Watch out for pricey PPI

Recently, the Competition Commission struck a huge blow for consumers when it decided to outlaw the sales of rip-off payment protection insurance (PPI) by lenders. For more than six years, I've waged war against this over-priced protection racket, because the PPI sold by lenders provides limited benefits at a sky-high price. Indeed, adding PPI to a personal loan can lift your monthly repayments by as much as a third (33%).

Fortunately, the Commission's ban prevents lenders from selling PPI to borrowers at the point of sale and for seven days afterwards. This 'cooling off' period will help to curb some of the worst high-pressure selling techniques used to sell PPI, making for a more competitive market. Thus, my advice is simple: never buy pricey PPI from a lender -- instead, get some quality quotes from independent providers of PPI.

3.    Watch out for tiered rates

As I explained last summer in Large loans cost less, most lenders reserve their lowest interest rates for customers who borrow larger sums. In other words, they operate 'tiered rates', which reduce as you borrow more. For example, the rate for a £5,000 loan may be, say, 9.9% APR, but drop to, say, 7.9% APR for loans of £10,000+.

Thus, my final trick today involves exploiting the glitches which often occur at the boundaries of tiered rates. For instance, which of these loans do you think will cost less: £4,999 at 9.9% APR or £5,000 at 8.9% APR? While the latter loan requires you to borrow £1 more, its interest rate is a full percentage point lower, which saves a lot more than a pound. Hence, it's always worth checking to see if borrowing a little more will bring down the TAR, thanks to entering a cheaper rate tier.

For a dozen more tips on cutting a loan to the bone, read The loan arranger rides again.

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