Top 10 tips when taking out a personal loan
If you’re looking to pay for a holiday, purchase a new set of wheels or fund home improvements in the near future, you may be planning on taking out a personal loan.
The bad news is the era of cheap credit is over. In the current uncertain economic climate, tighter lending criteria means that only those with the best credit ratings will be offered the low rates highlighted in adverts and best-buy tables.
The fact that the Bank of England base rate has plummeted to at an all-time low of 0.5 per cent has unfortunately not led to rock-bottom loan rates.
The bad news is the era of cheap credit is over. In the current uncertain economic climate, tighter lending criteria means that only those with the best credit ratings will be offered the low rates highlighted in adverts and best-buy tables.
The fact that the Bank of England base rate has plummeted to at an all-time low of 0.5 per cent has unfortunately not led to rock-bottom loan rates.
So what can you do to get a better deal?
1. Borrow more
Before signing up, look at the lender’s rates for different sizes of loan: at the moment, smaller loans of £1,000-£2,000 have higher interest rates to help banks recoup their administrative costs, so it could work out cheaper or only slightly more expensive to borrow £5,000 or above.
2. Consider a credit card
You may be better off considering a low-rate credit card, particularly if you’re looking to borrow a smaller amount, and you can guarantee to pay the card off quickly.
3. Think about the term
Make sure you choose the right repayment period at the outset, as interest rates and monthly repayments are fixed. If you borrow for longer than necessary, you’ll pay more interest than you have to.
4. Watch out for “typical” rates
Lenders are legally obliged to offer their advertised annual percentage rate (APR) to two out of every three successful applicants, but are then allowed to charge whatever they like to everyone else.
This means that if your credit history is not squeaky clean, the rate you are offered could be much higher than advertised.
5. Beware of “personal pricing”
Personal or “risk-based” pricing is taking a real hold in the personal loan market, with lenders restricting the best deals to those with perfect credit ratings.
This means that if you have a poor credit rating, you could find it difficult or more expensive to borrow.
6. Be loyal
Many banks reserve their best rates for existing customers who hold a current account or credit card, often because they have a better idea of their income and credit records, and may regard them as lower risk.
7. Avoid early-repayment fees
With a personal loan there are no upfront charges, and you are free to repay it at any time, but watch out for early-repayment fees of up to one month’s interest.
8. Clean up your credit record
With lenders focusing on the customers’ credit ratings, it is crucial to ensure your own record is as clean as possible.
The slightest blot – such as missing a single mortgage, credit card, loan or utility bill repayment – could lead to rejection.
Contact credit agencies such as Experian or Equifax to get a copy of your report, and ensure any errors are corrected.
9. Protect your repayments
The Financial Services Authority stopped lenders from selling some types of payment protection insurance (PPI) on loans last year, but if you do want to protect your repayments, you can still do this through specialist insurers.
10. Shop around sensibly
Take the time to shop around to get the best rate and payment term. But make sure you take care when applying, as filling out numerous loan applications can have a negative impact on your credit rating. The key is to avoid a scattergun approach to see which lender will offer you the best rate.
1. Borrow more
Before signing up, look at the lender’s rates for different sizes of loan: at the moment, smaller loans of £1,000-£2,000 have higher interest rates to help banks recoup their administrative costs, so it could work out cheaper or only slightly more expensive to borrow £5,000 or above.
2. Consider a credit card
You may be better off considering a low-rate credit card, particularly if you’re looking to borrow a smaller amount, and you can guarantee to pay the card off quickly.
3. Think about the term
Make sure you choose the right repayment period at the outset, as interest rates and monthly repayments are fixed. If you borrow for longer than necessary, you’ll pay more interest than you have to.
4. Watch out for “typical” rates
Lenders are legally obliged to offer their advertised annual percentage rate (APR) to two out of every three successful applicants, but are then allowed to charge whatever they like to everyone else.
This means that if your credit history is not squeaky clean, the rate you are offered could be much higher than advertised.
5. Beware of “personal pricing”
Personal or “risk-based” pricing is taking a real hold in the personal loan market, with lenders restricting the best deals to those with perfect credit ratings.
This means that if you have a poor credit rating, you could find it difficult or more expensive to borrow.
6. Be loyal
Many banks reserve their best rates for existing customers who hold a current account or credit card, often because they have a better idea of their income and credit records, and may regard them as lower risk.
7. Avoid early-repayment fees
With a personal loan there are no upfront charges, and you are free to repay it at any time, but watch out for early-repayment fees of up to one month’s interest.
8. Clean up your credit record
With lenders focusing on the customers’ credit ratings, it is crucial to ensure your own record is as clean as possible.
The slightest blot – such as missing a single mortgage, credit card, loan or utility bill repayment – could lead to rejection.
Contact credit agencies such as Experian or Equifax to get a copy of your report, and ensure any errors are corrected.
9. Protect your repayments
The Financial Services Authority stopped lenders from selling some types of payment protection insurance (PPI) on loans last year, but if you do want to protect your repayments, you can still do this through specialist insurers.
10. Shop around sensibly
Take the time to shop around to get the best rate and payment term. But make sure you take care when applying, as filling out numerous loan applications can have a negative impact on your credit rating. The key is to avoid a scattergun approach to see which lender will offer you the best rate.
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