How to get the cheapest loan - insider tips!

Personal loans aren’t quite as cheap as they used to be but they can still offer a low cost method of borrowing money. The cost of loans varies widely though. Pop along to your local bank branch and you’ll pay through the nose. Search online and you’ll get a much cheaper deal.

Personal loans allow you to borrow between £1,000 and £25,000 at a fixed rate of interest. Most forms of borrowing charge variable rates of interest so the fixed rates offered by personal loans are an attractive feature, especially for those on a tight budget.

Personal loans can be for up to 10 years, although between 3 and 5 years is more usual. Even though rates are generally quite low for personal loans, ideally you want to pay them off as quickly as possible as this will save you interest in the long run.

Don’t be too aggressive though, always leave yourself a little bit of slack in your budget to help guard against unexpected costs. They are some flexible personal loans around, which allow you to vary your repayments, although these tend to have higher rates of interest that are usually not fixed. Additionally, some personal loans will allow you to take short payment holidays.

Personal loans are unsecured so, if you were to default on your payments, the lender cannot seize your assets to pay off the remainder of the loan. However, if a lender issues a county court judgement against you and you fail to make the payments relating to this then they could apply for what is known as a charging order against your assets. When you sell your home, for example, you would then have to use part of the proceeds to repay the debt.

How’s your credit profile?

Let’s get the bad news out of the way first. Personal loans are generally only available to those who have a good credit profile. So this means you must not have missed any repayments on previous debts and that you haven’t changed jobs, bank accounts or moved home on a frequent basis.

If you’re newly self-employed this could also rule you out as it will be difficult to prove what your income will be. Oddly, if you’ve never borrowed anything before this can also count against you as you’ll have no payment history that a lender can examine

Each lender has its own idea of what makes a good borrower though, so some are more lenient with certain requirements than others. It’s difficult to say who these lenient lenders are though, as acceptance polices are generally not made public and change over time.

If you haven’t got a good credit profile then you’re more likely to be pushed towards a secured loan. The interest rates on these are usually higher than personal loans and there are additional fees and charges too. On top of that the rate of interest is usually variable rather than fixed. Finally, the loan is secured on your property so, as the warning goes, your home is at risk.

How loan rates vary

Most personal loan lenders offer tiered rates of interest meaning that they charge lower rates of interest for higher amounts. Typically, the lower rates kick in at £3,000, £5,000 and £7,500 and you may find that not that many lenders offer decent rates below £3,000. Among the big banks in particular, the difference in rates between each tier can be quite significant and this can lead to the bizarre situation whereby it’s significantly more expensive to borrow, say, £4,900 rather than £5,000!

Almost all companies now use what is known as risk-based lending when it comes to personal loans. This means that the rate they offer you will depend on your personal circumstances and could be higher than the typical APR they’ve advertised. By law they have to offer the typical APR to at least two thirds of people they accept for loans.

Don’t focus on the APR

Although the APR, or Annual Percentage Rate, is the headline rate you see advertised for all personal loans it’s not a perfect measure of the cost of the loan. They are different ways it can be calculated and it can be distorted when no payments are required for the first few months.

So when comparing two loans or more of the same amount and length of time, it’s better to use the total amount repayable rather than the APR. It could save you a few bob.

Watch out for additional costs

Although personal loans are fairly straightforward there are a few additional costs you need to watch out for. Some companies charge a fee of up to £50 if you want the money immediately rather than in a week or so. Indeed the odd company has been known to add this fee in as a default option so watch out for this if you don’t need the money straight away.

Penalty charges for repaying a personal loan early also need to be looked at. Since 31 May 2005, a lender can only charge two months’ interest if you repay a loan early – earlier loans may have higher penalties. It’s estimated that over two thirds of loans are repaid early, so a loan without any repayment penalty is preferable.

By far the most expensive additional cost is payment protection insurance. Traditionally this cover has been a license to print money as far as personal loan companies where concerned.

Indeed it can often cost a larger amount than you interest you’re charged! You don’t need to take it out as a condition of being accepted and, if you do think it’s worth having, you’ll nearly always be able to get it at a fraction of the cost from a specialist company that only offers these policies.