It’s not uncommon for many of us to feel the need to apply for a bank loan at some point in our lives. It could be to fund a necessary purchase, to pay for an unexpected expense, or as a means of managing several debts.
Taking out a personal doesn’t have to be expensive. Follow these nine simple tips to make sure you get the best deal that’s right for you.
1. Decide how much you need to borrow
In order to get the best deal on a personal loan, you need to start by asking yourself why you need the money, how much you need and how long you need to pay it back. This will help you in comparing rates and discovering how much different lenders will charge you for borrowing the same amount of money.
2. Check your credit history
One of the key factors that determines the interest rate you will be offered on a personal loan is your credit history. The higher your credit score, the more likely it is that you’ll be offered a cheaper rate. If you’re credit isn’t in the best shape, use these tips to improve your credit score before you apply for a loan.
If you are seen as a ‘high-risk’ borrower – if you have a history of defaulted payments and CCJs (County Court Judgements) for example – it’s likely that the loan deals you’re offered will have a higher APR as they’re specifically designed as loans for bad credit borrowers.
This is why it’s important to check your credit rating before applying if you want to make sure you’re eligible for cheap loans. You can do this online through the three main credit reference agencies in the UK, Experian,
Equifax, and Callcredit, though you may be charged a fee to view your credit record.
By checking your credit report you can make sure there aren’t any mistakes that might adversely affect your scoring, and also get more of an idea of what to expect when it comes to applying for credit. It is also possible to improve your credit rating ahead of applying for a loan.
3. Shop around and compare loans
When applying for a loan, or any financial product for that matter, it’s vital to compare what’s on the market to find a deal that’s right for you.
When you compare loans, it’s vital that you look beyond the top 10 loans available and compare loan rates and likely cost for the amount you need to borrow from all the loan providers out there.
You will need to look at the representative APR quoted as this will incorporated the cost of the loan including the interest rate and any charges. This representative rate however will only be offered to an average of 51% of borrowers, and may only apply to a fixed amount of money. So look for a loan that offers the cheapest rate possible for the amount you need.
Also remember to check the application criteria before you apply to make sure you’re eligible, as loan providers will often restrict their loan’s availability to those with a fair credit rating. Secured loans for bad credit, unsecured personal loans for bad credit and even debt consolidation loans for bad credit are available however.
4. Loyalty doesn’t always pay
When you’re considering a personal loan, it’s natural to feel more comfortable to go with the bank where you have your current account. They know you as a customer, and for you the familiarity feels safer. But that kind of loyalty doesn’t always reward you with the best deal.
You’re often more likely to be offered a better deal by a lender that’s trying to attract new customers. This could mean a lower APR or more flexible terms. It’s another reason for shopping around and comparing loans is important before you apply for a loan.
5. The loan term really matters
An important aspect of taking out a personal loan is how long you need to pay it back. This is what’s known as the loan term. Essentially, the longer the loan term, the more you will pay in interest overall. But a longer loan term also means that your monthly repayments will be smaller. It comes down to a balance between paying off your loan quickly and spreading your repayments more thinly.
6. Fix your interest rate
Fixing the interest rate on your personal loan ensures that your monthly payment remains the same throughout the term of the loan. This means that even if interest rates rise, the rate on your loan will remain unchanged. This makes it much easier when budgeting your monthly outgoings and helps you stay on top of your repayments.
Although nowadays, most unsecure loans have fixed interest rates, it’s always important to read the fine print before applying to avoid any surprises.
7. Avoid payday loans
If you’re in need of money quickly it can be tempting to opt for payday loans. These are short-term loans where funds are usually transferred within 24 hours of applying, and are also available to those with bad credit.
While these may sound great, you should avoid getting a payday loan at all costs. That’s because interest rates on payday loans are extortionately high and can often trap you in a cycle of debt, where you often end up paying many times more than the original loans. Read more about why you should avoid payday loans.
8. Consider alternatives to loans
Depending on how much you wish to borrow, you may benefit from taking out a credit card that offers interest-free purchases instead of a loan. This could particularly be the case if you are only looking to borrow a small amount, for example £500-£5,000, as everyday loans this small will often attract the highest rates of interest.
By taking out a 0% purchase card instead, you can borrow the amount you need (providing your credit limit stretches to this) without being charged interest, as long as you pay off the balance before the introductory period is up. This can be much more cost-effective than taking out a personal loan if you only need a small amount.
- Remember not to use your new credit card for anything other than the original amount you need to borrow.
- Make sure it is completely cleared before you start to be charged interest on your debt.
- To make this easier it could be worth setting up a direct debit from your current account to your credit card, to make sure a portion of the balance is paid off automatically each month until it is cleared.
- Make sure that minimum repayments are kept up until the balance is paid off.
- Make sure you get a card with a long enough interest-free term for you to pay the whole amount off, otherwise this isn’t a realistic option, and you may be better off going with a low standard rate credit card.
9. Don’t automatically take out PPI with your loan
If you like to have the reassurance of PPI (Payment Protection Insurance) on your loan then it’s worth considering. PPI protects you if you become unable to repay your loan because of a loss of income, and will cover loan repayments if this is the case.