The personal loan: lifeblood of the debt culture

Most adults have their first personal loan before they turn 25.  If you count credit cards, unsecured loans, then many adults in the UK have their first loan before they leave secondary school. The debt culture has created a strong economy for the UK, and provided a good lifestyle for most adults. 

The surprising part of the equation is that most people do not know what a personal loan really is or how to shop around for the best deal.  Few people realize that there is as much difference in the price of a loan as there is in the price of an automobile.

The first thing that most people are shocked to find out is that the interest rate advertised is rarely the interest rate you pay. While this makes many people feel like they ordered steak for supper and received fish and chips, it is a common practice when dealing with personal loans.

Some lenders offer personal loans for interest rates as low as 6% APR. However, this only means that you can get the loan at 6%, if you have so much money that you don’t need it, and a prefect credit rating.  The rest of us will probably pay 10, 15, or 25%, depending on the type of loan and who is lending the money.

Here are some important facts that you can use to secure a good deal and save a few hundred pounds.

Shop Around

Most people sign for a loan before they find out what interest rate they will pay. This can be tricky. If you shop around to a few places then you leave a ‘footprint’ on your consumer credit information.  If you shop around, then banks think that other financial institutions have turned you down. The result is a lower credit rating and a higher interest rate.

One way to shop around is to as hypothetical questions.  You can get your consumer credit information and then take it into the loan officer.  Ask them what they ‘think’ the interest rate will be. Or, you can go to a debt management charity to help you determine what you’ll pay in interest.

A little information can usually help you narrow down the institutions you will borrow from.  That way, when you do get your loan papers, you have a good idea whether paying an extra 5% is worth it, or if you want to shop around a bit more.

Compare APRs and TARs

Comparing interest rates sounds easy, but it isn’t.  There are two ways to calculate interest rates. The Annual Percentage Rate(APR) can be hundreds of pounds lower than the Total Amount Repayable (TAR). When shopping around, always ask for the TAR. Two lenders can have the same APR, but one will have a lower TAR.

Avoid PPI From the Loan Company

The Payment Protection Insurance (PPI) is currently under attack. A PPI can cost 1/3 the price of the loan, and offer less than 10% protection. In most cases, it is better to avoid the PPI.

Fixed Rate

There’s too much uncertainty with a variable rate. Note that where a ‘typical’ rate is advertised, lenders are required to give that rate to at least two thirds of successful applicants. However, when the rate is not fixed, it is hard to track what you ‘really’ pay.

Fees

It is important to have the loan officer outline the fees you will pay if you want to repay the loan early, or if you make a late payment.  You should also ask what the closing fee is. Of course they will balk, and some may outright lie, but asking will at least give you an idea.

This is another way that financial institutions differ. Some personal loans are cheaper to keep repaying than paying the early repayment fees. 

Flexibility

More than 70% of people pay off their personal loans early. This makes flexibility important, but there are other factors. What happens if you die? Will the total amount of the loan become due immediately? What if you miss three payments because of unemployment or illness. Does the loan become due instantly? What is the institution’s policy on working with people who default? 

Some institutions will work with their customers, others won’t.  Asking costs nothing and could save you from petitioning for insolvency if you lose your job.

Secured or Unsecured

A loan secured against the home means that you risk losing it if you miss payments. This is true. What most people don’t understand is that an unsecured loan can also result in you loosing your home.  A lender who deals with unsecured loans can ask the court to force the sale of the home to repay the loan.  Any type of loan can result in the loss of a home, an unsecured loan just adds a second step to the process.

However, the interest rate on an unsecured loan is substantially higher than the interest on a secured loan.

Shopping for a loan can be frustrating, especially if you have a less than perfect credit rating. But, a little education can make the process easier, and cheaper.