If you need to borrow money, the rising competition between providers is actually beneficial to you because this means that you now have the chance to get a cheap loan for a ridiculously low (compared to a few years ago) annual percentage rate (APR)*. However, before choosing a personal loan with a 2.8% APR, watch out for the small letters, which, usually hide significant facts (and costs) you definitely need to know beforehand.
The purpose of this comprehensive guide is to help you budget and plan borrowing carefully, and allow you to be able to tell which loan(s) you have the highest chances of getting before you apply and whether you can indeed afford the repayments. Among others, you will find an eligibility calculator and best buys that are regularly updated.
*The APR is the annual amount of interest on your total loan amount while the interest rate represents the current cost of borrowing.
What is a Personal Loan?
Personal loans are where a lender lends you a fixed amount, provided you agree to repay it (plus interest rate – consider it as fee to lend money to you) over an agreed time period. You pay fixed repayments every month and the total amount of money you borrow, as well as the interest rate that goes with it, are determined by your credit score. So, you get cash upfront and get to pay it back within several months or even years, depending on the agreement you have made, through monthly installments.
Below, you will find information about the cheapest personal loans in the current market and tips to help you decide whether another finance option might cover your needs in a cheaper way.
How to Choose the Best Loan for You
Loans right now are the cheapest ever. Competing lenders have dropped interest rates and annual percentage rates dramatically, which is actually great for you. However, beware of hidden costs as they can easily turn your loan from cheap to unfordable.
Before you go on with a type of loan, it is critical to think of the following:
- How much money will you need? – The best case scenario (and most beneficial to you) is to borrow as little as possible and pay the debt back the quickest you can. I suggest you do a budget first and then determine what amount you can comfortably afford to pay back. Your debt can increase significantly if you borrow too much.
- How long will it take you to repay? – Carefully determining the loan duration is crucial. If you decide to borrow over a longer period of time, your debt will spread out in monthly payments. The amount of these monthly payments will be lower than if you borrowed over a shorter period but it sky rockets the interest you will repay.
- Be alert of representative loan rates – All credit card and loan APRs are representative. This means that not all applicants that get accepted will have the rates advertised. In fact, only half of them (51%) will get those rates while 49% of applicants may end up with a more expensive loan than what they have applied for, if they get approved, of course. Unfortunately, there is no other way to tell whether you will eventually get the advertised rate until you apply. Beware that if you apply, it will show on your credit file, which can damage your potential to get credit in the future.
Borrowing More to Pay Less
Under some circumstances, it might be cheaper to borrow more money, especially when you are borrowing close to the rate boundaries set by lenders. For example, if you want to borrow £4,900 for 5.2% APR over five years, the total repayment would be £4,900+£675 (interest)=£5,575. If you borrow £5,000, the interest rate drops to 3.3% and your total repayments are £5,000+ £431 (interest)=£5,431. In this case, you will pay £271 less interest.
So, if you want to borrow near the threshold, do not go blindly with the best buy loan tables. Instead, use a loans calculator and check whether it will cost you less if you borrow more. If it does, you can put the extra money you will borrow for repayments.
Using Specialist Cashback Websites
Being a member of such sites may mean that you get extra cash as a bonus for signing up to some of their financial products. Before you do any business with them, though, go through the terms to make sure you will get the same deal. Also note that no cashback is ever guaranteed until, well, the money is in your account.