Checklist for unsecured loans
If you’ve decided to take out an unsecured loan, and you’re trying to choose which loan is right for you, here are some things to take into consideration:
- Over the course of the loan, how much will you pay in interest? You can check this by looking at the TAR (Total Amount Repayable). Although the lower it is, the better for you, there might be other factors that mean that you shouldn’t choose the cheapest loan that you could get.
- Does it come with a fixed or variable rate of interest? Most personal loans offer fixed rates and it’s probably best to go for this option as this way you’ll know exactly how much you’ll need to pay in the future.
- Will you be penalised for repaying the loan back early? 70% of borrowers repay loans early, but they’re often charged a penalty for doing this by their lender. Lenders can charge up to two months’ interest as a penalty for early repayment. If you think you might repay your loan early, look for a loan that will allow you to do this without charging you – our tool for searching loans lets you filter on this option so you’ll only see loans that don’t charge for early repayment.
It may be worth seeing if you’d be able to make overpayments in lump sums over the loan period.
Not surprisingly, you have to pay for flexibility and although you might have to pay a higher interest rate in order to have the option to pay back your loan early, you should consider doing this.
- Check that you can make the monthly repayments, and whilst it might seem like a good idea to lower the monthly repayment amounts by increasing the loan period, this will mean that you’ll pay more in interest in the end.
Checklist for secured loans
The same items that appear in the personal loans checklist are relevant here too. But the most important thing to look out for is the TAR as the rates that some secured loans change are punitive, so do your best to avoid this!
- How reputable is the lender? Only go with lenders that you know of who have a good reputation. Lenders who advertise on daytime TV are best avoided.
- Will you be stung with hidden costs? This is relevant for both types of loan, but pay particular attention with secured loans as the likelihood that costs will rise is increased with larger loans over a longer time.
Watch out for… cashback loans
Although these sound great because you’ll get up to 25% of your interest back when you pay off your loan, there are often catches with this type of loan.
To start with, you’ll usually be exempt from cashback if you choose to repay your loan early or if you miss any repayments.
You may also only be eligible for cashback if you purchase PPI…and that comes with a warning all of its own!
So just be careful when you see a cashback loan advertised and don’t get too carried away when you come across a cashback offer.
Watch out for …PPI
Payment Protection Insurance (PPI) has traditionally been an opportunity for banks and other financial institutions make a lot of money by offering overpriced protection for loan repayments. We originally raised awareness about this scandal in 2003 ahead of many other financial websites and publications.
The rules are set to change so that a lender can no longer sell PPI at the time a loan is taken out. But if you want to get some peace of mind, take a look at some of the independent providers of PPI. Be careful though, a cheap insurance policy isn’t necessarily the best insurance policy. If an insurer won’t pay out to you when times are tough, there’s no point insuring in the first place.
Watch out for … repayment holidays
Lots of loans offer you the possibility of repayment holidays mean that you can take a holiday from your loan repayments, usually for three months.
Although these sound like a good idea, when your holiday has ended, you’ll have the choice of paying increased loan payments to ensure that the loan is paid off by the agreed term or to extend your loan and pay it over a longer time span. Whichever option you choose, your total interest bill will be higher as a result of pausing your payments.
Therefore payment holidays mean that borrowing is more costly and might mean that you’ll take longer to pay back your debt, so this option isn’t as attractive as is first appears.
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