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The Do & Dont's of Personal Loans
By Jane Mack 2006
Did you know that there are probably around 400 to 500 different personal
loans on the market at any one time ? Where on earth do you start?
The important thing is to shop around but what follows is a list of
fundamental 'Dos' and 'Don'ts' that should point you in the right direction.
Do:
- Be wary of 'typical' APRs. This means that the interest rate you
pay depends on your personal financial circumstances. Although two-thirds
of borrowers must be given the 'headline' typical rate, you might not
qualify if your credit history isn't spotless or you don't fit the
lender's ideal customer profile.
- Compare the cost of loans by looking at the Total Amount Repayable
(TAR) as well as the Annual Percentage Rate. This shows the total amount
in cash that you're expected to repay, including all monthly repayments,
fees and charges. Generally speaking, the lower TAR, the better the
deal.
- Opt for a fixed interest rate rather than a variable one.
This means that your monthly repayments stay fixed throughout the life
of the loan, which not only helps with budgeting but also ensures you
don't get any unpleasant surprises.
- Check out the penalties for early repayment. Around seven out of
ten personal loans are paid off early, so look for a flexible loan
that allows overpayments and watch out for loans that charge hefty
fines for early settlement.
Don't:
- Get a secured loan. These are like mortgages and mean that if you
have trouble making repayments, you can lose the roof over your head.
An unsecured personal loan shouldn't put your home at risk.
- Go to your local bank branch for a personal loan. High-street banks
don't usually feature that often in the Best Buy tables for personal
loans, so make sure you shop around and compare costs before choosing
one.
- Automatically sign up for the expensive Payment Protection Insurance
(PPI) that'll invariably be offered to you. Although it may be reassuring
to think that it'll cover your monthly repayments if you lose your
job or can't work because of accident or ill health, or pay off the
debt if you drop dead, it's massively overpriced. If you want some
form of loan protection, buy a stand-alone policy from companies such
as Paymentcare or Burgesses or even the Post Office. It'll be much
cheaper.
- Fall for loans with gimmicks such as repayment holidays and 'buy
now, pay later' deals. Ultimately, you'll pay for such 'benefits' so
opt for a simple and straightforward loan instead. Complicated products
are often more expensive.
One final point is that if you're using a personal loan to consolidate
various debts, don't forget you will simply have switched your debts
to a new lender. The total debt will still exist and it'll only be paid
off when you actually finish paying off the loan so don't be fooled by
the notion that you've 'cleared' your credit
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