Taking out a personal loan should be a relatively straightforward affair. With loans, there tend to be far fewer hidden catches and pitfalls than you come across in a typical credit-card deal. But there are still a few issues to watch out for both before you apply for a loan and during the application process itself.
1. Check the type of credit search
When you apply for a loan, the provider will check your credit record to confirm your identity and make sure you are a responsible borrower. But if you keep getting turned down and end up making numerous applications, they could all be noted on your record – and this could give future lenders a negative impression about you.
Look for lenders who let you make an informal application to see if you are likely to be accepted: this involves a “soft search” of your credit file which does not show up on your record.
2. Find out about extra charges
As well as the cost of monthly repayments of the money you borrow plus interest, some lenders might impose extra charges such as a set-up fee (although these are uncommon) or early-repayment charges in the event you want to pay the loan off sooner than planned.
You never know what your financial situation might be in two, three or five years’ time, and repaying early can save you a lot of interest – so look for a lender who won’t penalise you for doing so.
3. Is that the real interest rate?
Most marketing material and best-buy tables will give the rate of interest on a loan as a “representative APR” (annual percentage rate). This is average yearly interest with any charges taken into account – but the problem is there is no guarantee that you will be eligible for this rate.
“Representative” means the rate has to be made available to a majority of customers, but this could be as few as 51%, with the other 49% of borrowers being charged much more. If you find a competitive loan deal, it is best to make an informal application (see 1, above) to find out if you’ll really be entitled to the headline rate.
4. Borrowing more can cost less
It might seem counterintuitive, but smaller loans often come with higher interest rates. If you are borrowing less than £5,000 say, you can expect charges to be substantially higher than on loans of £7,500 plus.
This is because, with smaller loans, lenders still face the same administrative costs as with bigger sums. As result, it can be more economical to increase the size of your loan: this isn’t always the case, but it is worth checking.
5. Look at the total cost of your loan
Borrowing over a longer period can cut the size of your monthly repayments to quite a significant degree. If you were to get a loan for £8,000 at an APR of 8%, for example, your repayments over two years would be £361.82 compared with £162.21 over five years.
But the total interest you’d pay on the shorter deal would be just £683.64 rather than £1,732.67 on the five-year loan. So if you’re looking to minimise the overall cost of borrowing, choose the shortest loan period that you can afford.
Find out more about getting a loan with Zopa.