for years. We look at how you can secure yourself the best deal.
Credit cards have their uses, but with rates of around 12%, they’re not a sensible way to borrow long term - especially when you compare them with rates of 6% on some personal loans. Personal loans, however, have golden rules of their own.
Don’t borrow for the wrong reason
First, don’t take a loan to cover day-to-day expenditure. Julie Hedge, adviser with IFA Christie Scott, says: “Loans should only be taken out for something specific like home improvements or a new car.” However, this rule is often broken. Intelligent Finance says 12% of people with loans use them to consolidate credit card debts.
The second rule is for habitual rule-breakers: if you’re borrowing to pay off debts, never – ever – do it again. Paul Banfield, an adviser from IFA Best Advice, says: “Most people build up credit card debts again immediately, and get trapped in a vicious circle. If you take out a loan to clear your balance, cut up your cards or it will just happen again.”
Third, check for early repayment charges, because although 70% of people repay their loan early, most personal loans carry penalties for doing so. This may not seem important if you can’t see yourself repaying early but, as Hedge says: “You shouldn’t need a loan with penalties because there are so many cheap deals without them.”
Finally, take a loan out for as short a period as you can afford. The most common reason for debt problems is an unexpected life change, such as redundancy or childbirth. And the longer the loan lasts, the more likely it is something will happen to compromise your ability to repay it.
Rates and restrictions
Providing you are sensible with your debt, there are just two things to consider when choosing the best loan. Firstly, the interest rate, which will be expressed as an annual percentage rate (APR) indicating the total cost including all charges and fees.
And secondly, the small print. There may well be restrictions on some of the most competitive loans. Most, for example, have early repayment penalties – but, as many borrowers pay off loans early, you may want to weigh up the rate against the restrictions.
The government last year introduced regulations to make adverts “clear, fair and not misleading”. Loan providers now have to place ‘honesty boxes’ in their promotional literature, and those failing to comply can be fined by the Office of Fair Trading and their licence revoked.
Also,
payment protection insurance products must now be detailed separately and clearly from the rest of the loan. All this puts the consumer in a far better position to avoid being bamboozled by appealing headline rates and selecting the wrong product.
So as long as you read the small print carefully you shouldn’t have any nasty surprises.
Deals online
Assuming you have access to the internet, you will often be able to find the cheapest personal loan deals online making it much easier to shop around the marketplace for the best deal. A good place to start would be by checking out the best buy tables on our site. If you’re not sure exactly what the terms and conditions of a loan mean then contact the provider directly or consult an independent financial adviser.
