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8 steps to find the perfect personal loan

This article provides you with 8 steps to find the perfect personal loan, and the sort of things you need to think about before signing up to any personal loan.

Shop around

Always remember to shop around for your loan, certainly don’t just visit your current bank and get a loan from them without checking out the whole market. By making sure you get the best loan for you, you could save yourself hundreds of pounds over the lifetime of the personal loan.

The only reason that your bank may be a good choice is if you have any adverse items on your credit record, because your bank knows you and your credit history and they can give your application special consideration.

Don’t just look at headline loan rates

Some lenders of personal loans offer a flat rate to all their customers, but as many as 80% of personal loan lenders use what is called ‘risk-based pricing’ and will offer a rate dependent on your credit history.

The typical quoted rate in any loan advert may seem great, but it may not be the loan rate you end up with. Before you accept any loan make sure you know exactly what you will be paying.

Illustrations for loans may be shown in different ways, some may show the annual percentage rate (APR), with or without payment protection insurance included, by the monthly sum repayable, or by total amount paid.

Consider the repayment period

You are better to pay off the loan as soon as possible as to minimise the amount of interest you will pay over the period of the loan. If you borrow £10,000 and pay it back over 10 years you will pay more in total interest than if you pay it back over 5 years, as you are borrowing over a longer period.

If you borrow over a shorter term, say 5 years you will have high monthly payments but you will pay less in the long term.

This is especially true if you are buying something with a short life such as a holiday or car, you don’t want to still be paying off the loan if you finished the holidays years ago, or if the car is depreciating faster than you can pay off the loan.

Compare prices for large and small loans

The more you borrow the lower the interest rate you will get, this does not mean you should borrow more than you need, but it may be wise to borrow just a little more than you need if your initial borrowing requirement is very close to the next lower tier interest rate.

For example if a borrower applied for a £4,999 loan from a certain company, the APR would be a huge 14.90%. However, if the borrower took out a £5,000 loan from the same company, the interest rate would be just 7.90%, because the sum borrowed comes into the next interest tier. Over 36 months a borrower with the £4,999 loan would pay back £6,148, while someone borrowing a £5,000 loan would pay back just £5,609, a saving of £539.

Beware of redemption policies

Some loan providers may charge you a redemption penalty if you decide to repay your loan early. So if you do expect to repay your loan early then check that your loan company does not make a charge for redeeming early. It is possible to get loans that do not have repayment penalties.

Check the small print

Always check the small print of any loan that you apply for – make sure you understand all the terms of the loan.

Payment Protection Insurance

Taking out payment protection insurance can greatly increase your repayments, and in truth payment protection insurance protects the lender rather than you in the event of you becoming ill or losing your job. There are many exclusions, as even if you decide to take out this type of insurance, statistically you are unlikely to make a successful claim.

If you feel you do need this type of insurance, shop around for an alternative "accident, sickness and unemployment" policy, as cover offered by the loan provider is rarely good value.

Consolidation loans

Consolidation loans can make sense when you need to pay off expensive store cards by taking out a fixed rate loan at a lower interest rate. Just beware of extending the repayment period as you will end up paying more money in total over the increased term of the loan.

Related Sites of Interest

Alliance and Leicester
Accepted Loans