Sounds shocking, but its true! By the end of January 2005, Britons owed £882 billion to mortgage lenders, £54 billion to credit-card companies, and another £130 billion towards personal loans, overdrafts and other unsecured lending.
If taken into consideration the annual interest bill on this pile of debt it could easily touch £80 billion. But all is not lost, say experts, only if we turn a bit smarter and cut this bill by a quarter it will put an extra £20 billion in our pockets.
Experts say all we need to do is learn to shop around for the best deal rather than hopping straight into our local bank branch. Here are five simple steps to tracking down the perfect personal loan.
Best buy tables
Begin by looking in the newspapers or by logging onto the Moneyfacts website. This website has the definitive tables. But of late Moneyfacts ranks personal loans by their cost including payment protection insurance (PPI). Since loan PPI has a bad name in UK’s financial market, it’s advisable to steer clear of it. Instead search for uninsured loans.
Move over APR
Many advertisements don’t carry Annual Percentage Rates (APRs) which is a reliable tool for comparing the true cost of loans. However, the most reliable way to find out the exact cost of loans is to compare the Total Amount Repayable (TAR). With the help of TAR, you'll know exactly how much you have to pay back, right down to the last penny, including all charges for credit. For instance, the lowest TAR for a £5,000 loan over 3 years without PPI was £5,440, and the highest was £6,503. What it means is that the lower the TAR, the cheaper the loan, while all other things remain stable.
Short-term is ideal
Similarly, if you borrow a £5,000 loan over 3 years you’ll pay just £440 in interest. But if you borrow the same amount over 5 years you would incur interest of £738. The reason: you're repaying your loan over a longer period. Obviously, the 5-year loan will have lower monthly repayments compared to a 3-year loan, but in the long run it turns out to be more expensive. If you can afford to shorten the loan period, nothing like it!
Read between the lines
Always remember to ignore gimmicks like repayment holidays and free additional benefits, while you’re shopping for personal loan, because you'll never know when you have ended up paying them bigger interest bill or fees. Also, keep in mind early repayment penalties, as one of the study says more and more borrowers are repaying their loan early of late.
Apply online to cut cost
Best rates will only come your way after you pay by Direct Debit, since lenders prefer this mode of payment as they are cheap to administer. Direct lenders are the one who offer the lowest rates, so applying by telephone or online is usually your best bet. But avoid high street which is a bad place to look for a loan!
Know what you’re buying
It’s very important to know what you're buying. Since there are two popular types of personal loans rates – fixed and variable – available in the market, for most borrowers, a fixed-rate loan is usually the better option, as in variable rates repayments could rise or fall.
Posted
on : Wed, 23 Mar 2005 00:00 GMT | Loans News
By : Paula Jenkins
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