A personal loan is perhaps the closest form of borrowing to the classic image of a financial product. This type of loan has been available in one form or another for thousands of years, and is offered by just about every bank. It’s also one of the most flexible loans, with almost every purpose considered by lenders. Loans are typically made for between one and seven years, and borrowing typically ranges from £1000 to £25,000. Many other types of loan, such as car loans or bad credit loans, are often in reality simply rebranded personal loans advertised for specific purposes.
What does representative APR mean?
APR is a measure of how much the loan will cost you each year based as a percentage on the loan amount. Those with good credit histories and circumstances, such as those who are on well paid permanent contracts and have no debts, will usually be offered the typical APR rates, while those whose circumstances are not quite as good are likely to receive offers somewhat higher than the advertised rates. The rates advertised must be offered to at least half of those accepted for the loan. Lenders vary massively on how different non-typical APRs are from the advertised rates. While some will increase the rate only marginally, others will exploit the borrowers lack of options and offer APRs many times the advertised rate.
Is there any advantage in sticking with my bank?
Sometimes banks reward loyalty with better rates. As your own bank has a better idea of how you manage your money and how much you have available for repayments than another lender relying solely on your credit profile and the information you provide, they can sometimes offer a better rate. However their rates are rarely better than those advertised, so you should not assume that your bank will always be cheapest. It is best to apply for the loan with the lowest rate you can reasonably expect to be offered before using your own bank as a final resort if you are declined by several cheaper lenders. Sometimes banks only lend to their own customers, although in this case setting up a new current account or switching to them is a worthwhile consideration.
Should I go for a longer term loan or pay back quicker?
The key choice when making a loan decision is affordability. Taking out a loan with repayments that you struggle to afford might leave you in more debt if you are faced with fees for missed payments, or are forced into other forms of borrowing. Nevertheless, you do not want to be paying back your loan longer as the interest you pay will be more. Striking a balance between the two is a good idea – giving you both the security that you will be able to pay back your loan, while ensuring that you aren’t needlessly paying interest. If you come into more money unexpectedly, you can usually pay back your loan early in part or in full for a small fee.
Should I just pick the lender offering the best rates?
Getting excellent customer service is often worth more than a fraction of a percentage point. If you run into financial difficulties, knowing that your lender is flexible can make a real difference. Similarly having a low early-exit fee if you come into some money can cut the cost of borrowing substantially. Don’t just look at the representative APR, but select a lender on the entire package.