If you need to borrow money, the rising competition between providers is actually beneficial to…
Let us be honest here. There are more than enough types of loans available out there with extremely competitive rates. However, getting the cheapest of all is still quite challenging. Remembering the following 4 tips will keep you on the right track, though:
1) Make Sure You Are Borrowing The Minimum Necessary
And by “minimum”, I mean the absolutely minimum. The lower the amount you need to borrow, the easier it will be to get it.
2) Always Check Your Credit Files To Ensure No Error Is Hitting Your Creditworthiness
The truth is that credit ratings are super prone to errors. In fact, almost 30% of them contain mistakes that could easily saddle you with a much higher interest rate. You may even be denied credit all together because of that. If you do find an error, flag it with the credit agency asap.
3) Refrain From Using a Loan Comparison Service
Chances are this will affect your credit score and you won’t get a good rate after using it. Instead, check out your own bank first and their standard loan rate. If their rate is cheaper, it it is certainly worth trying to give them a call. Your bank knows more about you and your credibility, and can use what they already know to predict your behaviour in the future, should you need to borrow from them. They will probably give you a loan when you struggle with other lenders.
4) Consider a Credit Union Loan
For those that do not have access to financial services and products, credit unions can be a good option. Credit unions are not-for-profit, independently-run, organisations that serve their members by making loans, accepting deposits, and providing a wide range of financial services at reasonable rates. In the UK alone, there are about 500 credit unions, each with its own services and regulations regarding who can join. In the past, credit unions lent money only to their members that also held savings with them. This is no longer the case.
Not long ago, several credit unions collaborated to offer an online portal for their financial products, called CU Loans. You just fill in the information they require (i.e. name, email, reason you need a loan, address, etc.) and they will then use those details to find a credit union that you are eligible for. The minimum you can borrow is £1,500 (max. £15,000) and you can pay it off between 12 and 60 months. Your loan is processed through the credit union you are found eligible for. The representative APR is 12.9%, but since credit union loans are capped, you can be charged with a maximum of 42.6% APR. Note that the cap is usually used for particularly short-term loans; most loans are traditionally cheaper than the cap.
Overall, credit union loans have:
- No hidden costs.
- No penalties for repaying early.
- Life insurance (many of them) as standard for the loan.
Consolidation, Secured & Unsecured Loans: What You Need to Know
Consider Consolidation Loans? Yes…but…
There is a catch every time you get a consolidation loan; a catch most people fall into, when they believe that a consolidation loan can save them money by reducing their regular expenditures using one single monthly payment. Don’t get me wrong here. A consolidation loan can do that for you. But, have you wondered at what cost? They way all this is done will force you to stretch your borrowing over a longer period (perhaps 15 or even over 20 years). This means that you will be called to pay interest rate for all these years. You can understand that the amount you will pay back is going to be colossal, right?
Still can’t see the whole picture? Let’s give an example:
Suppose you have taken out a £10,000 loan on a credit card at a nightmare-inducing 18%APR. If you pay it off within 5 years, you will pay £5,240 in interest. You want to cut those costs and get a consolidation loan at 9% APR. Cheaper, right? Spread it over 20 or 25 years and see what happens. The actual interest is almost 3X more (£15,200 for 25 years)!
That aside, there are many consolidation loans that are, in fact, secured loans (will talk more about them below). This means that you not only pay for longer (hence, more), but also risk your home.
So, if you are getting a consolidation loan to repay several small credit card debts or loans, make sure you don’t just consolidate. Instead, aim to pay them the quickest possible at the lowest possible rate.
- Secured or Unsecured Loan?
Unsecured personal loans are, paradoxically, a far better option than secured ones. Here is why:
- A secured loan gives the lender the right to repossess your home (or something else you own) if you can’t repay the loan. It is highly unlikely something like that can happen with an unsecured loan.
- Secured loan rates are NOT at a fixed rate. This means that you don’t know what you will pay from the start. Plus, if the lender decides to up your payments (happens quite a lot actually) or the country’s interest rates change, your loan’s rate will change too. Not the case with unsecured loans whose rates are usually fixed.
- Secured loans stretch the debt over many years. Don’t be fooled by the “one easy low monthly payment” promise. I have already explained above that this means more money flying out of your pocket.
Best Alternative Options: Government Loans
Government loans are definitely worth considering. See it there are any available to you before you go for commercial debt. Now, there are 2 ways you can do this: seek (1) local aid or (2) national aid.
(1) Local Aid – Residents that are struggling with an emergency can now get help from their local authority. This is an initiative put into effect in 2013 and is cut for people with serious health problems, those unable to pay for their food, in need of help to stay in their own home, or just coming our of care. Unfortunately, it is up to each council to decide who is eligible to receive financial assistance and who is not. If you do get selected, you will be given cash, food grants or furniture.
(2) National Aid (budgeting loans/advances) – Those loans are usually available to people with low or no savings that receive benefits. The money you can receive can be used to pay a wide array of essential services or items, from furnishings to school uniforms.
- If you can’t find someone to lend you the money you need cheaply, it is probably best not to insist on borrowing money anymore. Maybe the universe is trying to tell you something.
- If you need a loan to cut the cost of an existing debt, a payday loan is NOT your best shot. Please read the Payday Loan Guide for details and alternative options you could consider.
- If you have a reasonable credit score, consider a cheap credit card deal, personal loan or even extending your mortgage instead of getting a secured loan that only gives the LENDER security.
Q: I need more money than what they will lend me. Now what?
A: I strongly suggest you take the cash they give you if you have already applied for a loan (I assume the cheapest in the market) because it is on your credit file already. Then, you can apply for another loan to receive the money you need to fill the gap. If your credit score is good, you will most likely get the second loan quite easily.
Q: What should I do if UK rates change?
A: If you have taken out a fixed-rate personal loan, instead of a secured loan (see above), you won’t be affected at all because the repayments and the rate you are given when you get the loan are fixed over the duration of the loan. This can only affect you if you are looking to get a new loan.
Q: What’s the deal with the credit crunch? Will it affect loan rates?
A: Since the credit crunch, things are a bit difficult if you want to get a personal loan. The borrowing criteria are now stricter but if you do get a loan, you will definitely benefit from the particularly low interest rates.
Q: How soon can I receive the money?
A: This has to do with the lender and their regulations. Some advertise they will give you the money instantly. Watch out for their interest rate, in this case, because you may end up paying a much higher interest rate for the duration of the loan than what you could get if you waited a few more days to get the cash. Alternatively, you could pay a delivery fee (£50 more or less) to receive the cash quickly (if your loan offers that option). Beware, as this can be set as a default option.
Q: Is a homeowner loan a good option for me?
A: If you own a home or have a mortgage on your home, you could apply for a homeowner loan, which is usually a secured loan. This means that if you can’t repay the debt, the company will take your house. That being said, though, there are also some unsecured personal loan companies that need their customers to own a home so that they can lend them money. The concept behind this prerequisite is that those who own a home are much less likely to go default or bankrupt. It is just too high a risk for them.
Q: What about car loans straight from the dealer? Are they worth it?
A: Potentially. If you can get a 0% deal, it is certainly worth considering. However, you are more likely to get such a deal if you make a decent deposit first. Now, if you can’t get that deal, check the APR (annual percentage rate) on what you are being offered. Note that a flat interest rate some car dealerships quote is not the same as APR. This is a trick to make expensive car loans appear cheap. To find out (roughly) the APR, double the flat rate.
“What is the total amount I will be repaying?”. That is the question you should always ask yourself when you compare loans.