Customers can end up paying twice as much interest on their personal loan if they don’t shop around for the best deals.
A three year, £5,000 personal loan from
MoneyBack Bank will cost £5,473 with a 6.1% APR. But go for the same deal at
Lloyds TSB, and it will cost £5,883 thanks to the eye-watering 11.4% APR.
While there are a number of competitive deals available on the market, prices can vary significantly, as the table below shows.
| Typical APR | Monthly Payments | Total cost |
| 6.1% | £152.05 | £5,473.80 |
| 6.5% | £152.93 | £5,505.48 |
| 7.9% | £155.91 | £5,612.76 |
Morgan Stanley | 8.9% | £158.07 | £5,690.52 |
Halifax | 9.2% | £161.07 | £5,798.52 |
Lloyds TSB | 11.4% | £163.42 | £5,883.12 |
£5000 loan over three years, excludes PPI
Lenders can manipulate APRs
Always use the monthly payments or total amount repayable when comparing loan deals.
This is because lenders manipulate their headline APR to make it seem like a bettter deal to customers. Look at the Halifax deal in the table. According to the FSA’s loan calculator, a £5,000 loan repaid over three years at 9.2% APR comes to a total of £5,740.72 – nearly £58 less than what Halifax claims.
An even better example can be found with the Black Horse personal loan. With an APR of 12.9%, it might look like the most expensive deal of all, but the total repayable is only £5,609.52, cheaper than all but the top two in the table.
One final thing to be wary of is the lenders’ use of the term ‘typical rate’ when advertising their APR’s. What it basically means is that lenders are only obliged by law to offer those rates to two thirds of customers they accept.
Because they want to be sure they’ll make top dollar out of you, having an exemplary credit record won’t guarantee you that juicy headline rate. Always check what rate you’re getting before you sign up to a loan.
PPI can undo all your thrifty work
Now that you’ve shopped around and found the best deal, give careful consideration to whether you need payment protection insurance.
While some might find it worthwhile, it doesn’t come cheap: The MoneyBack Bank deal will cost you £6,407 including PPI – over £500 more than the most expensive offering on the table without PPI.
For those you really want PPI, choosing a stand-alone policy rather than simply stumping for a bundled package from your lender can cut costs. Don’t bother with the unemployment element of this insurance if you are self-employed as you will almost certainly be unable to claim for redundancy protection.
Look out for early repayment penalties
Being fined for paying off your loan too early will erode a lot of the money you saved by shopping about. Not all loans have early repayment penalties, but some lenders charge as much as two months’ interest. Consider carefully how long it will take to pay off your loan before choosing.
Remember, the sooner you pay off the loan, the less it will cost you every month – though of course the total amount of interest you pay will increase. Extend the best buy Money Back loan over five years, and it will cost £5,796, the same as the Halifax offering.
