Can you still get a cheap loan?

Tuesday, March 11, 2008

The best-buy personal loans on the market

Where to go
The bank or building society where you hold your current account or mortgage might seem like the obvious place to start if you're looking to borrow money but be aware that it might not be offering the best loan on the market.

It could, however, be able to offer you a quicker decision than other banks due to the amount of information it has about your financial history.

But Lisa Taylor, analyst at Moneyfacts, said it was a good idea to shop around: "Don't be fooled into thinking that your existing bank or building society will always give you the best deal, just because you have a relationship with them.

"With detailed computerised credit scoring systems used these days, loyalty makes little difference."

More crucial than ever to shop around
The importance of shopping around for the cheapest loan cannot be emphasized enough.

The difference between the best and worst interest rates can be almost double, so choosing the wrong loan provider can be a costly mistake.

For example yourpersonalloan.co.uk has a typical rate of 6.7% for a loan of £25,000 paid back over five years. The total amount repayable would be £29,350.80.

But if you took out the same size loan with Northern Rock, the newly-nationalised bank would charge a typical rate of 12.9% meaning the total amount repayable would be £33,549 - that's a staggering £4,198.20 more than the cheapest loan on the market.

Compare personal loan rates now

How is the loan priced?
While interest rates should be relatively easy to compare and evaluate if you are getting a good deal, there is the added complication of typical and personal priced loans.

In fact, only 66% of accepted applicants will receive the advertised rates, while the remaining 33% of applicants could be offered a higher or lower rate depending on their individual credit rating.

And what type of loan is it?
It is also important to think about whether you want a secured or unsecured loan. Unsecured loans are based on your personal credit rating and income; the maximum borrowing is normally £25,000 and they can be taken out for any time up to 10 years.

Secured loans are cheaper but they are only available to homeowners and the loan is secured against the property so if you default on your repayment you could lose your home. The maximum borrowing varies between lenders but terms can be up to 25 years. Especially in the current climate of falling house prices, a secured loan should really be a last resort.

Insuring your repayments
Another thing to take into consideration is the insurance you may be offered. When you take out a loan you will normally be offered a PPI (payment protection insurance) policy which is designed to make payments for you if you cannot repay the money due to accident, sickness or unemployment.

This insurance can add thousands of pounds to the cost of a loan and some providers add it automatically unless you specify otherwise. As lenders don't have to include the insurance cost in the interest rate, they often lower the rate, but load the insurance cost; making it look cheaper, but actually the overall cost is higher.

If you are worried about how you would pay back the loan if you could not work, then a standalone PPI policy is normally a better bet than a policy bundled in with the loan.

Standalone PPI policies are offered by a number of firms including Antinsurance, Paymentcare and the Post Office. "The difference in the most competitive and most expensive cover can add an additional £1,760.40 to a £5,000 loan over three years or as much as £4,157.40 to a £25,000 loan over five years," said Moneyfacts' Taylor.

Last word
Remember, a personal loan is usually a large long term fixed financial commitment, so don't blindly plump for the first deal you see.