Personal loan rates have been creeping up as volatility in the financial markets continues.
While loan rates were as low as 6% during the days of easy credit, now even the most competitive providers are charging rates of between 8-9%.
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: Don't just compare APRs
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: Watch out for small loans
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%.
4: Don't overpay on PPI
Once you have found a
competitive loan, it's important you don't undo all your hard work by simply choosing that lender's
payment protection insurance (PPI) policy.
If you're not familiar with it, PPI promises to meet your repayments should you become unable to, be it due to health reasons or job loss.
In these uncertain times, PPI has become extremely popular. However, it can also be extremely expensive if you choose the wrong policy, and automatically tacking your lender's PPI onto a loan almost always fits into this category.
Take the time to compare PPI policies, especially those offered by
independent providers, and you could shave hundreds, if not thousands, off your loan costs.
