The Loan Arranger Rides Again!
Before you start looking around for a personal loan, be sure to read these twelve tips first!
Today, I don my 'Loan Arranger' hat and facemask (cue the finale of the William Tell Overture) to show you how to get a far better deal when arranging a personal loan!
Hold on a minute, how can I claim to be the 'Loan Arranger'? After all, I don't have a trusty sidekick named Tonto, nor a lightning-fast horse called Silver. However, I did work with or for dozens of the UK's leading lenders over a twelve-year period before I became a financial writer. Thus, here are a dozen tips which I picked up during my years on the dark side:
THE BASICS OF BORROWING
1. Do you really need a loan?
First off, I'd encourage you to ignore your 'urge to splurge'. Pause for a moment and ask yourself whether you need to borrow at all. Why not save up for all but your biggest purchases instead? You could then earn interest on your savings instead of paying interest on your loan.
What's more, the price of electronic goods in particular tends to fall over time, so playing a waiting game often means a bigger bargain.
2. How much do you need?
Don't be tempted to borrow more than you need, because it'll only cost you more in the long run. So, if you need to borrow £8,000 to pay for a new kitchen, don't be tempted to borrow £8,500 in order to blow £500 on treats. All this will do is increase your interest bill and leave you in even more debt.
In addition, the shorter the term of your loan, the less interest you'll pay. Therefore, it makes sense to pay off your loan over, say, three years instead of four -- but only if you can afford the higher monthly repayments.
3. Don't put your home on the line
These days, browsing almost any publication (local and national newspapers, magazines, websites, etc.) throws up dozens of advertisements for secured loans. Don't take comfort from the word 'secured' -- what it means is that these loans are secured against your home, which is at risk if you can't keep up your repayments. To see what happens when secured loans and second mortgages turn nasty, read this article.
4. Avoid the lure of consolidation loans
Many people struggling with high levels of non-mortgage debt fail to recognise their underlying problem, which is that they spend far more than they earn. Instead of cutting back, they roll up their existing debts into a single debt known as a consolidation loan.
However, Fool research shows that five out of six people who do this go on to amass fresh debts to accompany their new loan. Hence, I'd urge you to steer clear of consolidating your debts and, instead, pay a visit to our Get Out of Debt centre!
5. Let your mouse do the work
Don't spend hours wandering between branches to check out all the loan offers in your local area. Instead, check the entire market with a one-minute online search; because many leading lenders save their best deals for Internet-only loans. Do a search at The Fool's Loans Centre.
TRICKS OF THE INTEREST-RATE TRADE
6. Don't use APRs as your benchmark
The Consumer Credit Act requires all credit providers to display a standardised annual percentage rate (APR), which is a guide to interest rates. However, APRs can be fiddled in at least three ways, as I revealed in When Interest Rates Lie. Therefore, if you want to compare the true cost of loans, find the total amount repayable (TAR), which shows the loan advance plus all charges for credit. So, check the TAR, not the APR!
7. To fix or not to fix?
Although all but a few personal loans charge a fixed interest rate throughout the life of the loan, some lenders do offer variable-rate loans. Although your monthly repayments never change with a fixed-rate loan, they can go up and down (usually up) with a variable-rate loan. Interest rates in general have been creeping up lately, so a number of lenders have increased their variable rates by several percentage points. Personally, I'd recommend a fixed-rate deal every time, but the choice is yours.
8. Typical rates and untypical customers
In the past, personal-loan providers would offer the same interest rate to all borrowers. However, these days, lenders prefer to offer interest rates which depend on borrowers' personal circumstances, credit history and ability to repay. This 'risk-based pricing' is now used by over eight in ten lenders.
Theoretically, two-thirds of borrowers should receive the advertised 'typical APR', but several lenders have found ways around this rule. That's one reason why so many applicants don't get the headline typical APR and, instead, are offered a higher rate. So, if you don't have a good credit history, or think that you'd be a borderline case, look for a lender which charges the same rate to all borrowers.
9. Take note of tiered interest rates
Many lenders charged tiered interest rates, so the more you borrow, the lower the interest rate. These tiers tend to kick in at round numbers (particularly £5,000, £7,500 and £10,000), so do check to see if you'll save money by borrowing, say, £5,000 instead of £4,950. Borrowing an extra, say, £50 to save £50 in interest is a smart move.
INSURANCE, CHARGES AND PENALTIES
10. Steer clear of payment protection insurance (PPI)
PPI is a huge swindle. Read this article, Time To Clean Up This Swindle, to find out why.
11. Watch out for additional fees
With the Bank of England's base rate on the rise, more and more lenders have resorted to charging additional fees to support their profits. For example, Sainsbury's Bank charges a whopping £50 to send a cheque to you by courier, while Northern Rock charges £35 for its same-day CHAPS transfer service. My advice would be to ignore these express-delivery services and instead opt for free delivery by BACS, a bank transfer which takes 3-4 working days.
12. Check early settlement penalties
Roughly seven in ten personal loans are paid off early, usually because borrowers replace an existing loan with a new one. Some lenders will charge two months' extra interest if you settle your loan early, while others won't charge any penalty. Before you take out a loan, find out whether you'll be fined for early repayment.
Finally, I'll leave you with the question posed at the end of Lone Ranger episodes:
"Who was that masked man?"
"Why, that was the Loan Arranger!" [grins as he rides off into the sunset]