If you are struggling with your finances in the current environment spare a thought for Chancellor George Osborne. But why should he be the only one budgeting? Now is probably the most important time to be your own Chancellor and, paradoxically, one of the best ways of saving money could be to take out a
personal loan.
We all know the difficult job Chancellor George Osborne has in balancing the UK’s economy but now is the ideal time to conduct your own budget on your own finances.
With tax increases and cuts in public services spending, taking time out to review your finances could help reduce your own personal debt. As Kevin Mountford, head of banking at moneysupermarket.com, says: "Although there is very little you can do to avoid some changes, spending half a day reviewing all of your personal finances could lead to an instant pay rise which the Chancellor cannot get his hands on.”
Take a look at the different forms of debt that you have - these could range from credit card debts to overdrafts - and look at the interest rates you are being charged. Even if you don’t owe very much, you are probably paying more than you should for your debt.
And this is where personal loans come in. Many people are finding that consolidating all their debts into one personal loan could save them thousands of pounds in interest alone.
Of course replacing one debt with another is to be avoided where possible. But if you can’t pay off all you owe, replacing one debt charging a high interest rate with a loan with a lower rate does make sense.
So, with interest rates on five-year personal loans ranging from 7.5%, cut up the cards you are paying up to 30% interest on, pay them off with a loan and start saving.
Make sure you do your homework first. A recent survey from the Association of Business Recovery Professionals revealed that 7% of those struggling with debt have already contacted a loan shark or doorstep lender, while a further 13% have considered doing so. Make sure you choose a reputable provider and that the interest rate you are being charged is competitive.
There are generally two types of personal loan, secured and unsecured.
With a secured loan you have to put up something of value as security should you default, typically your home or car depending on the value. For this reason, secured loans tend to be for a larger amount over a longer period. And the interest rate charged tends to be less. However, if you default you could lose your car or home.
Unsecured loans are usually for a lower amount and the lender just looks at your financial circumstances to see if you can afford it. They are typically for periods up to five years. Before going down this route make sure your credit file is up to date before applying; you can get free trials from the credit agencies.
Before applying for a loan, you must make sure you understand the costs, charges and terms and conditions which vary from lender to lender. Ensure it does make sense for your financial circumstances. Keep the term of the loan as short as you can manage and double check the small print of the contract.
Have a look at the providers' tiers; it may be cheaper to borrow slightly more money. For example a provider may charge 15.7% on loans up to £5,000 but 8.8% on loans above that. If you borrow £4,700 on this basis, you would pay back £5,838 over 3 years. Borrowing an extra £300 means you would repay just £5,679 - leaving you £159 better off.
Try not to borrow for longer than necessary or beyond the life of the product you are borrowing to purchase. For example if you are borrowing to buy a car and intend to change the car in three years time, consider taking out a loan of that length.
One thing that is crucial when taking out a personal loan to consolidate your debt is to actually pay that debt off! Don’t end up with even more debt, tempted by that new car or holiday of a lifetime.
They can come through the savings you could make with your new personal loan.
