The number of Brits taking out loans has plummeted in the last 12 months as the recession bites.
New figures from the Finance and Leasing Association (FLA) show that
secured loans fell 83% among its members in the 12 months to February, while
unsecured loans were down 45% during the same period.
The FLA believes consumers are reluctant to commit to longer-term credit repayments, while rising unemployment also means that granting loans is riskier for lenders.
“Our figures show that FLA members have written £660 million worth of new unsecured loan business in the first two months of 2009, compared with £1.1 billion in the same period last year," adds FLA chief economist Geraldine Kilkelly.
Sometimes a loan is necessary
While the waning dependence on credit is a great thing, there may come a time in your life when you need to access funds you simply don't have, meaning a
loan is your only option.
If so, then it's absolutely essential you find the cheapest possible deal to minimise the long-term impact on your finances.
This hasn't been made easier by the fact that loan rates have been rising despite the repeated cuts to the base rate, but there are still some
decent deals on there.
Thankfully, there are a number of steps you can take to keep your loan costs down.
1: Always shop around
One of the biggest mistakes you can make is to head straight to your bank for a loan without checking rival offers.
Despite what it may claim, your bank is unlikely to be the cheapest on the market, so taking the time to
shop around may well save you hundreds of pounds.
Interestingly, the high street banks are often more expensive than their smaller counterparts, so don't limit your search to the big players in the market.
2: Compare total cost of loan
When shopping around you'll no doubt use the headline rates as a point of comparison, but these can be misleading as banks all use different methods for calculating interest.
That means
loans with identical APR can actually work out very different in terms of overall cost.
For example, both Alliance & Leicester and the Bank of Scotland are offering a competitive rate of 8.9% on a £10,000 loan over four years. However, the total cost of the Bank of Scotland loan is £12,025, compared to £11,852 at Alliance & Leicester.
Only ever use APRs as a rough indicator of value; overall cost is a far more accurate tool when comparing loans.
3: Small loans have bigger rates
Banks do not offer
loans out of the goodness of their hearts – they want to make money off of you.
The problem for them on smaller loans is that customers are able pay off their debt far quicker, thus losing them revenue.
In order to rectify this issue, banks significantly increase the rates on smaller loans – usually below £7,000 – with some charging up to 25%.
If you only need to borrow a small amount of money, it will be far cheaper to put the expenditure on a 0% credit card for new purchases, then switching between 0% balance transfer offers until the debt is repaid.
If this isn't an option, then it is more important than ever that you shop around for your
loan, as the difference between providers on small amounts is huge – Alliance & Leicester charge a rate of 8.9% on a £5,000 loan, while Halifax charge 15.9%.
